Now that the uncertainty around the elections has come and gone (along with the endless TV ads and robocalls), the market can return to its regularly scheduled rally.
First and foremost, the newly divided Congress means there will be no corporate tax cut repeal, which is good news for the stock market. Last year’s Tax Cuts and Jobs Act cut the corporate rate from 35% to 21%, and that’s resulted in the fastest pace in earnings growth in decades.
Additionally, the Republicans picked up seats in the Senate. This decreases the odds of rolling back the tax legislation in 2021 if a Democrat should win the White House in 2020.
I continue to believe that Tuesday’s election outcome and the prevailing market sentiment set us up for a year-end rally.
Making Sense of Midterms
Last week, I was interviewed on Newsmax TV. I discussed the recent market turmoil and what to expect from the midterm elections.
And here are some things that the midterms wouldn’t have had an effect on either way:
- Longer-term interest rates, both in the U.S. and around the world, are still historically low. The fed funds rate is still at 2.25%, and the U.S. 10-year note is at 3.15%.
- Corporate earnings, thanks to the aforementioned tax policy, are running at a 20%-plus pace.
- Unemployment is still at 3.7%, with more companies looking for workers than are available.
- Wage growth is increasing, now at 3.1%. This is the strongest pace since mid-2009.
- Manufacturing data suggests a continued expansion. The Institute of Supply Management’s October reading came in at 57.7. A reading above 50 correlates with economic expansion.
The Best-Case Scenario
The market’s focus now shifts to economic data and the Federal Reserve. The Fed is expected to raise rates another quarter point at its December meeting, with another three hikes in 2019.
The best-case scenario for the markets would be a sustained growth trajectory. An overheated economy would cause the Fed to step up the pace of interest-rate hikes, and this would be a detriment to stock owners.
In this case, slow and steady wins the race!
Editor, Crypto Profit Trader