US Mid-term exit polls do have a hint of Republican favour about them.
It is very early at this stage, but could there be a growing political swing capable of creating a lasting bottom for the US stock market?
Some traders and investors are certainly buying on the basis that a Republican Congress-creating policy gridlock would be a good thing for the economy. However, what if what is happening is a bigger historical event that we have thus far considered?
Will the Mid-terms see a return toward Republican candidates that flows through to the Presidential election? If so, then the Republicans may have absolute policy control in just two years.
This could mean a lot more than just a conservative agenda. It may also see a tough talking President, but perhaps more realistic in some ways approach to the Ukraine war. With the outcome being a possible faster pathway developing toward peace than currently seems achievable.
Such a policy achievement by either party would go a long way in assisting the global, and particularly Federal Reserve’s fight against inflation. Not only would energy and food prices begin to moderate, but the Fed would not have as high an end point for its interest rate tightening policy.
A Republican agenda would undoubtedly include a reduction in government spending, perhaps further tax cuts and a stronger fossil fuel agenda. This is not political bias, just based in what both parties are saying they would look to do.
As one of the world’s biggest bear market forecasters this year, since the first week of January, I find myself being forced to consider if some hope could develop around Ukraine in some way, and if energy and food prices could be lower and perhaps not as high a Fed Funds Rate in coming years.
To be fair, we cannot be sure which party will more effectively handle these issues, but a very different policy stance could deliver different trajectories for recovery from what is clearly a downward spiral in both global events and economy at the moment.
The stock market’s reaction in coming hours and over the next few days, will potentially be telling from a very long-term historic perspective.
If stocks rallied on a substantial swing to Republicans, but could not hold those gains and was to fall back below levels we are seeing today, this unfortunate price development structure would confirm my central view that US stocks are still to fall a further 20%.
If stocks were to still be headed higher in 3-4 trading sessions. However, it may be that the great correction of 2022 was now complete and behind us.
Hold on to your hats as the next few days could decide the fate of the US stock market for the next 2-6 years.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
