From an election wipeout for the Republicans to massive volatility in the markets in the wake of the election, it was quite a wild ride last week.
I can’t say that some of this wasn’t expected, but I think almost everyone was surprised at the size of the swing in both the House and Senate. But looking out over time, it shouldn’t have been as much of a surprise. Turns out it is very common for the midterms to have a swing to the opposite party. Below is a picture of how that looked for many midterm presidents.
The big question is how will the opposite parties work with each other? My hope is they will both get to the work of the people and try to start solving the major issues we have in this country. If it’s just more fighting and impeachments, I guess the voters will have their say in two more years.
Meanwhile, the markets have been very volatile over the past week as they have digested this new reality.
The market was up a lot on the day after, but you could see that it ended with a whimper not a bang. Follow that up with one of the largest selloffs we’ve seen in years, and you have massive volatility that our model has been foretelling for the last year. Between tariffs, a war in Iran, inflation, and now a blue wave in the elections, the market has been set up for some rather large swings. On the positive side, you’ve had massive investment in plant and properties, corporate profits that are still healthy (though moderating), and consumer spending that seemingly won’t stop.
As I’ve said many times, part of being in the markets (and one of the reasons you get higher returns from stocks) are the ups and downs that we have to put up with. Here is a chart that shows what we should expect from market swings. This from our good friends at Ned Davis Research.
This would be what I would say is “normal.” Every investor should expect some level of this volatility, depending on your actual asset allocation. If you are more conservative, you should expect a percentage of these swings, anywhere between 50%-80% of these numbers.
I would say that we have coached most people to expect that. Where the wheels fall off the bus is when the markets are down more than 20%. Most people can’t or don’t want to see their investments decline by that much. Nobody wants to go through 2001 or 2008 again. The problem of course is there are no bells that ring to say get in or get out. Which is why we have a model that looks at data to tell us should we be taking more risk or less? So far this year it has told us to take less risk, and I would say largely to the benefit of you, it has been mostly right. In fact, here is what the model looks like now.
You can see that the model is deeply negative. Now it won’t stay that way forever, but we are looking for a “real” turn to take on more risk in the portfolio.
For now, it looks like we’re in an okay spot, especially with the revelation with Nvidia last night.
That stock is down a five percent today, so we will see how this plays out. My guess is where there is smoke there’s fire.
That’s all I have for this week, as always, please let us know if you have questions or concerns. Happy to have a conversation about this or any other topic. Have a good rest of the week.