Get Ready For Midterms

The midterms typically have a positive effect on equities. Technical indicators suggest the market is at a low, we see comfort owning equities into next year.


Americans are set to hit the polls on Tuesday for midterm elections. As of right now, the Democrats control both congress and the executive branch. However, as history - and polls - suggest, we are likely to see Republicans regain seats lost during the last election.

Stock Market Reaction

Historically, the stock market has reacted favorably following midterms and even more so when either Republicans control the senate and house, or there is a split congress.

spx performance

Source: Bloomberg

 

To add to a bullish equity picture, in recent weeks the market has been more numb to negative headlines around inflation. This is coupled with technical indicators that hint at a low in the market:

  • Higher-lows in RSI despite a lower-low in price. 
  • Breadth (the percentage of stocks above their 50 and 200-day moving averages) has been steadily climbing. 

Areas of Opportunity

With the market showing signs of a bottom, polls suggesting a split or Republican controlled congress, where are the areas screaming buy?

Republican Donators Outperforming Democrats

Interestingly, since the start of the year, firms which donate heavily to GOP candidates (MAGA ETF) have outperformed their Democrat counterparts (DEMZ ETF) by over 25%. 

Firms held by MAGA include several energy firms like Haliburton, Conoco, Marathon and Diamondback Energy.

Maga vs Demz

Source: TradingView.

Anti-ESG

Despite the need to decarbonize globally, a GOP congress will likely force the Democrats hand at decarbonizing. Steer clear of clean energy areas like renewables companies and battery manufactures.

Domestic Oil & Gas will likely benefit as the US looks to reduce reliance on foreign oil by ramping up production to reduce prices at the pump.

XLE (US Energy ETF) > ICLN (Global Clean Energy ETF)

Pro-Tech

Tech stocks have taken it on the chin with the Nasdaq-100 down -25% from the start of the year. The Democrats may get roadblocked on their anti-trust legislation against some of the large players like Google and Meta. Further, R&D tax breaks leveraged by these firms could get revived after expiring last year, helping boost earnings. 

A Word Of Caution

With the aggressive selloff this year, we are heading into tax-loss harvesting season. This is the time when investors unwind positions they no longer want to hold, booking a capital loss they can apply against their taxes. This could force markets lower into December, albeit temporarily.

Concluding Thoughts

The midterms typically have a positive effect on equities for the following year. Coupling that with technical indicators suggesting the market is at a low, we see more comfort owning equities into the new year. 

Fun fact: All the ETFs mentioned in this post can be found on our ETF screener meaning you can add them to your portfolio if you see fit. 

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