What a Reversal of Power Means for Stocks

It's midterm election eve... The House and Senate are up for grabs... What a reversal of power means for stocks... An eye on cannabis... A bear in Greg Diamond's backyard... Mailbag: More about jobs and feedback on Dan Ferris' latest essay...

The markets are watching tomorrow's elections...

And while some state-level races can matter to individual companies or industries, the biggest Election Day story during a presidential midterm year is what happens in the House and Senate.

Today, Democrats have control of the House of Representatives... And the 50-50 split Senate swings the Democrats' way, too, because the vice president can cast tiebreaking votes.

Tomorrow's election will determine which party, if any, will control Congress for the next two years... and the markets are watching to gauge the potential impact on things like fiscal spending or the likelihood that certain legislation gets passed or not in the years ahead.

Political handicapping isn't our main game here, but we'll certainly be watching...

Historically, the party in control of the White House tends to lose the House during midterms, and there are dozens of competitive races... Republicans need a net gain of only five seats to take the House and a single seat to control the Senate.

Like we said ahead of the 2020 presidential election, the forward-looking stock market tends to predict the election results better than the other way around. If that's the case, signs are pointing to a Republican win in the House and Senate.

As Stansberry Research senior analyst Matt McCall wrote last month...

That could explain the recent weakness in clean-energy stocks, which have been underperforming the last few weeks... With a Republican sweep of Congress, other sectors could outperform the market... specifically, fossil fuels (oil and gas) and infrastructure.

I (Corey McLaughlin) can't tell you today what's going to happen with certainty tomorrow. And many states won't finish tallying their races for a while. But history suggests that just the mere fact that midterm elections have arrived on the calendar could lead to higher U.S. stock prices.

Since 1946, the S&P 500 Index has been higher 19 out of 19 times in the 12-month period after U.S. midterm elections. Why? Who knows for sure... It could be simply that stocks go up more than they go down over long periods of time.

In other words, go one year out from any day on the calendar, and more often than not you're going to find a history of positive returns. (Side note: This is why I'm skeptical of statistics about higher returns one year later based on a single event.)

But if that's not a satisfying answer, here's another argument... Perhaps the stock market's historical record following midterm years is an indication that some resolution to political uncertainty, whatever the outcome might be, is welcome in the markets.

Historically, we are entering a great time for stocks...

Our colleague and True Wealth editor Brett Eversole wrote in September that one of the strongest cycles in stock market history is returns relative to the presidential election cycle – specifically, above-average returns after a midterm election. As Brett wrote...

Stocks perform OK during a president's first year in office. Then, in the second year, they go through a major slump. That's when the worst returns show up. Many believe this happens because of the uncertainty around midterm elections.

After the midterms, certainty returns to the markets... and Year 3 leads to the biggest returns. Year 4 is also usually another solid year as we head into the next presidential election.

Take a look at this chart, showing S&P 500 Index returns based on the years of a presidential term (using the end of September through the following year to best measure midterm timing). As Brett showed...

This is an average, of course. There's no guarantee of the past repeating itself, and the S&P 500 has sometimes lost money during Year 3s in the past too, Brett noted...

But the idea of this pattern continuing would certainly be a welcome one to many folks after one of the worst performances for stocks and bonds in history... recession indicators lighting up like fireworks on the Fourth of July... and inflation still at 40-year highs. Even in the 1970s midterm years, the S&P 500 returned 12% in 1970, 21% in 1974, and 6% in 1978.

So far, under President Joe Biden's "election cycle," the S&P 500 returned 28% in Year 1 (measured starting from the September 30 before his election)... then lost 16% in Year 2. The pattern is exaggerated from the average, but it tracks the broad pattern thus far: outperformance in Year 1 followed by underperformance in Year 2. Five weeks into Year 3, the index is up 6%.

The best-case scenario for U.S. stocks...

Purely from the perspective of stock market direction, the best-case scenarios would likely be "gridlock" – meaning a split in control of Congress versus the White House – or a clean Democratic sweep. Both scenarios suggest the minimum uncertainty, by conventional thinking.

Since 1950, the S&P 500 has risen an average of 15% in the 12 months after the midterm vote...

But two of the four highest returns occurred when the party in control of the White House lost control of both the House and Senate: in 1954 under Republican President Dwight Eisenhower and in 1994 under Democratic President Bill Clinton.

The S&P 500 was up 33% and 25%, respectively, a year later after those outcomes.

The other two biggest post-midterm returns were 29% following the 1962 elections... and 28% after Election Day in 1990.

In 1962, Democrats kept control of both chambers of Congress under President John F. Kennedy. (This time around, that appears to be an unlikely scenario for the Biden administration heading into tomorrow, though it could still happen.)

Meanwhile, in 1990, Democrats boosted their majorities in the House and Senate with Republican President George H.W. Bush in the White House, though that starting point doesn't align with today's unified one-party control.

None of these scenarios played out amid today's economic turbulence, though... We're looking at 40-year high inflation, and the Federal Reserve is raising interest rates in an economy that's treading water at best.

The point is, election cycles do carry some influence on stocks. All four of the above instances happened during a president's first term... or in "Year 3," as Brett described.

Remember all of this in the context of a historically terrible year in the markets. If you are a believer in history, a reversal of congressional power – or a "red wave" tomorrow – could act as rocket fuel for at least a short-term market bottom.

There are other votes to watch, too...

Many gubernatorial races are also taking center stage for politics watchers. Their results could preview the next presidential election two years from now...

But from an investor's perspective, let's look at a policy issue that millions of voters will decide on tomorrow...

Stansberry Research senior analyst Thomas Carroll has his eye on ballot measures that could legalize cannabis in five states: Arkansas, Maryland, Missouri, and North and South Dakota.

There's increased chatter that cannabis restrictions will loosen at the federal level, too, even with a potentially lame-duck Congress. That could include Senate passage of the SAFE Banking Act, which would explicitly allow banks to do business with legitimate cannabis companies.

As Thomas sees it, these factors could push cannabis stocks into the same rally they enjoyed in late 2020.

Thomas has recommended several cannabis companies as an analyst for our colleague Dr. David "Doc" Eifrig's new health care-focused Prosperity Investor monthly publication. As he told me in a recent note...

For example, the AdvisorShares Pure US Cannabis Fund (MSOS) rose 68% during fourth quarter 2020. It went on to rise another 50% by February 10, 2021 after the Georgia runoff elections.

Of course, this marked just about the beginning of the end of the post-pandemic stock market boom times. Like many speculative stock plays, the cannabis sector is down 80% from those highs back then. But Thomas notes that since the end of September, MSOS is up about 20% versus 6% for the S&P 500.

If more states green-light legal cannabis tomorrow... and the banking legislation around cannabis moves ahead in Congress... Thomas believes cannabis stocks may outperform even better than in late 2020.

We haven't mentioned the midterms in any depth for months…

But tomorrow, whether you've been following them intently or trying to tune them out (perhaps to get through each day without being compelled to throw something at a wall...), they are here.

We'll keep you posted on the nationwide outcomes and what our editors and analysts are saying about the results...

Tomorrow evening, I probably won't have much more to report on the elections as the polls will be closing after our Digest arrives in your inbox. We'll share more news on how the election outcomes are moving the markets as it happens.

Now, some more about bears (in Greg Diamond's backyard)...

By now, regular readers should know that our friend and Ten Stock Trader editor Greg Diamond recently declared the bear market over. Done. Finished.

Well, someone did not agree. As Greg shared in today's Weekly Market Outlook for Ten Stock Trader subscribers, a literal bear showed up in his backyard recently, made itself at home in the kids' playground, and caused an unwelcome Halloween scare...

According to my neighbor who has lived in this community for 44 years, this is the first time he has even seen a bear.

While it may be young, it's still a bear... and it's very strong.

But I hope you see the irony here. As Greg said...

I found it humorous that, for the first time in four decades, a bear happens to turn up in my backyard... right around the time I turned bullish on the stock market.

But Greg's not taking it as a sign from some disembodied Bear or Bull Market Decider (my words) that he's wrong about his latest call. Quite the opposite. It seems like it made him think more about it and be more bullish...

Here's an argument that capitulation already happened...

In his Weekly Market Outlook today, Greg said a lot of folks who do not believe a bottom has arrived for stocks are arguing that we haven't seen "capitulation" yet. Investors haven't thrown in the towel and given up all hope.

I'm among those who have been waiting for this moment. I said a few weeks ago that I thought we were in the "fear" stage of a bubble... which is before capitulation arrives. But Greg makes a good argument that we may have already seen the biggest "uncle" point.

He shared this chart and explained why...

The chart label says it all... This year, we've seen the largest destruction of wealth in modern market history.

Now look at where the big bottoms occurred on this chart...

2002 – There's capitulation and a major low in stocks. (Capitulation means investors have given up trying to recapture lost gains due to falling stock prices.)

2009 – We see capitulation and a major low in stocks.

2020 – Again, there's capitulation and a major low in stocks.

2022 – We can see a new low.

Importantly, Greg then paired this assessment with more research on the S&P 500's recent behavior despite this "destruction of wealth." He also shared long-term technical indicators that suggest this entire yearlong bear market is simply a long correction within a longer bull market.

His conclusion? Despite the bear in his backyard, he's bullish today.

Existing Ten Stock Trader subscribers and Stansberry Alliance members can read Greg's latest update here for all the details (and a picture of the fuzzy little bear enjoying the playground, too).

We're On the Brink of a Zombie Apocalypse

Inventories in the diesel market are near an all-time low for the U.S., "with 25 days remaining" to fix the problem, warns George Gammon of the Rebel Capitalist. In this interview with Daniela Cambone, he explains and also previews the midterm elections...

Click here to watch this episode of the Daniela Cambone Show right now. And to catch all of Matt's shows and more videos and podcasts from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.

New 52-week highs (as of 11/4/22): Chevron (CVX), Enerplus (ERF), Freehold Royalties (FRU.TO), Gilead Sciences (GILD), McDonald's (MCD), RenaissanceRe (RNR), SLB (SLB), Texas Pacific Land (TPL), and ExxonMobil (XOM).

In today's mailbag, more thoughts about the jobs market, which we discussed last week... and feedback on Dan Ferris' latest Friday Digest... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I agree with Rodney Y. [in Friday's mailbag]. I recently called a small appliance repair company in a coastal community where I have rental property. The person who answered my call said they were two weeks out before I could even think about getting a technician to the location. And then told me the rest of the story...

"They have a small shop with only three technicians and a huge list of customers. One of their young technicians simply called in one day and announced he would not be in next week because he was going hunting in eastern Oregon. No planned vacation time off, no funeral leave, no flu, no I hurt my back, no FMLA, no anything. Just, I am going hunting next week, period. Fire me if you want, I don't care." – Paid-up subscriber John M.

"I am aware of at least a few young people who have jobs and are looking for better have not found anything in months even interviewed and not hired. I also hear of the unreliability of workers. Yet those I know demonstrating steady employment can't move.

"From my observation it seems there are a lot of help wanted signs, but 'not really'. It has brought me to wonder if the government is paying businesses to seek employees but then the business really would rather go without or requirements are so tight they will wait.

"Many businesses are closing here in Erie for lack of employees. Still mighty confusing and is government data and analysis really what's happening?" – Paid-up subscriber Tim B.

Corey McLaughlin comment: To this point, you might want to check out this recent piece from Stansberry NewsWire analyst Kevin Sanford. He shares data that support exactly this thought... that the labor market isn't as strong as the "official" word might suggest.

"I don't see any discussion or consideration of it, but discussions of unemployment should also consider the comparison of necessary qualifications for jobs versus the qualifications possessed by the unemployed (and those removed from the labor force but of working age): Necessary skills, physical limitations, optimal ages, etc.

"With the increasing high-tech nature of jobs being created, how well do the necessary high-tech skills match up against the existing skills of the unemployed? What percentage of the unemployed are in the older age groups (planning ahead for retirement) beyond the optimal age groups for high-tech job openings?

"Years ago (20+) when I worked in labor-force research, one of the major issues was in being able to retrain existing (baby-boomer) employees for advancing high-tech skills necessary for evolving jobs, and that was accomplished by their employers. Back to today, after massive layoffs mandated by government requirements in response to the devastating pandemic that didn't really exist, how do the qualifications of the unemployed and the out-of-the-labor-force match up to job openings.

"I also read recently that a much lower percentage of women than men have returned to the labor force, opting to stay home and take care of their families. So with the various mismatches, how do we move ahead to meet needs?" – Paid-up subscriber Kevin S.

"Dan, For those who don't yet understand the government's slant on the oil industry and the 'central regulation of industry,' perhaps they should read Ayn Rand's Atlas Shrugged. She wrote that in 1957 and sure as shootin' predicted what we have devolved into. My only question is, "Will the real John Galt please step forth?"

"These are indeed scary times. Keep on delivering the message. We who have listened to you are grateful for your advice and analysis of the situation." – Paid-up subscriber Dave P.

"Dan, Spot on with your assessment. However, there are many other knowns and unknowns to consider.

"Republicans regain control of executive and one or both houses, and the loosening of oil and gas exploration regulations may happen. It may take a few years for that to occur. Lots of ifs to consider, but for the near term my money is on higher oil and gas prices too!

"The strategic oil reserve will need replenishing as well as resolution to the Ukraine war. OPEC will do their best to keep prices higher, as they see demand destruction coming as world governments are hell bent on EV conversions..." – Paid-up subscriber Lee G.

"Dan, the answer to your question of whether Elizabeth Warren believes what she's saying or not is a big fat NO!

"She knows the oil companies have to sell their product on the world market which determines the price of oil and gas, but she wants you and I and everyone else to believe what she's saying, that the oil companies are price gouging and her and her cronies are going to make them pay.

"This fires up her base because her base always reacts emotionally. They can always be counted on to never think critically because they are one dimensional thinkers. Read and react...

"The Economic Law of supply and demand has been proven again...

"Had the federal government continued to issue the drilling permits and the Keystone pipeline was in operation American oil companies could have made up the petroleum shortfall and oil prices would have been lower and there would be no oil company boogeyman to blame and best of all a silent Elizabeth Warren." – Flex Alliance member Kenneth S.

"You commented that all of the noise about taxing excess profits discouraged oil companies investing in more production. They have dealt with such noise many times in their history. The real issue discouraging investment is the previous low price and likely future low price.

"As you point out, the investment in more production is a long term payback and the future for oil does not look good. EVs are the future and wind and solar are getting dirt cheap. With battery storage prices going down as well, we do have a chance to transition to a renewable energy future that is less expensive than the current fossil fuel based economy.

"While I doubt we will make it to 100% RE grid by 2030, it will happen much faster than most expect." – Paid-up subscriber Robert P.

"What you write is true, but you ignore the cause.

"Check back to a previous Alliance presentation. I think it was given at about 2018. Its title was 'Cry Wolf.' I think that outlines exactly what is unfolding now. We are simply in the ending stage of a fiat currency's life cycle.

"What makes this important is we might just start a digital fiat currency to reset the economy. Which means, the cycle repeats and in 30 some years we are right back to where we are now. Another disaster!

"We need to take inflation out of our monetary policy so this disaster never happens again. That will not happen if people do not understand what is really causing this reset.

"Making Bitcoin, or something equivalent, a global reserve currency might just be a good way to fix this recurring disaster and permanently stop it.

"I enjoy following Dan Ferris and Doc's work. Keep it up!" – Paid-up subscriber Tom B.

"Dan Ferris stated, 'If that doesn't scream right in your face that Powell isn't planning to pivot, I don't know what will.'

"Mike Tyson stated, 'Everyone has a plan until they get punched in the mouth.'

"We will see how well Powell sticks to his 'planning' once the economy crashes and punches him in the mouth." – Paid-up subscriber Mike B.

All the best,

Corey McLaughlin
Baltimore, Maryland
November 7, 2022