Midsize pickups are in for the long haul
History shows Dow rallies after midterms
More models being rolled out as lower cost, versatility draw array of buyers
As stock market reactions go, the rally on Wednesday following news of a divided U.S. government was about as far from a scary Brexit-like moment as you could get.
Power, politics and money collided following the Nov. 6 midterm elections, as the Democrats snatched back control of the House, prompting stocks to do what they have historically done once election uncertainty fades and clarity over the outcome emerges: They rose.
The Dow Jones industrial average and broader Standard & Poor’s 500 index each rallied more than 2 percent on Wednesday, the first full day of trading following the midterms.
“Markets like certainty, which we now have, and the split result is what (Wall Street) expected,” says Thorne Perkin, president of Papamarkou Wellner Asset Management in New York.
So what comes next for markets? And what does the shifting political landscape mean for 401(k) investors and their money?
❚ Midterms bullish past: Looking at the big picture, history shows that the midterm elections act as a launching pad for stocks. The S&P 500, for example, has been higher a year after every midterm election since World War II. It’s been a perfect 18 for 18.
And over the past 50 years, the large-company stock index has risen an average 16 percent in the year after a midterm vote, according to Capital Economics.
The Dow also tends to go into rally mode after the midterm votes are counted. The blue-chip stock average has risen 4 percent, on average, in the fourth quarter of midterm years and followed that up with gains of 5.2 and
3.6 percent in the following two quarters, according to LPL Research. That nine-month stretch is the best of the four-year “presidential cycle.”
“The outcomes (of the midterms) matter less than the end of the campaign,” explains Kate Warne, market strategist at Edward Jones.
❚ Gridlock is also good: Even though Republican President Donald Trump’s colleagues in the GOP lost control of the House in Tuesday’s election, divided government, Wall Street history shows, can lead to strong market returns. That’s mainly because legislation that might get in the way of economic growth or make it harder for companies to make money never gets
passed.
“Historically, divided governments have been good for markets,” says Brad McMillan, chief investment officer at Commonwealth Financial Network.
Why? “There’s no real policy changes, as Republicans and Democrats can’t agree on much,” he says.
The new balance of power in Washington, D.C., points toward a positive market reaction. The S&P 500 has gained 10.8 percent, on average, when there is a Republican president and the breakdown in Congress is a Republican-controlled Senate and a Democrat-led House, data from Strategas Research Partners show.
❚ Sector by sector pros and cons:
Stocks in certain segments of the market received a boost because laws detrimental to their profitability, which might have gotten enacted without gridlock, are now likely to end up on the chopping block.
For example, that a “blue wave” – or Democratic sweep of both chambers of Congress – didn’t happen has given fresh life to many pharmaceutical stocks that might have been hurt by a Democratic push to reign in high prescription drug prices.
On Wednesday, drug maker Eli Lilly jumped nearly 4 percent and health insurer Humana rallied 6.5 percent. Shares of medical equipment maker DaVita jumped more than 10 percent after California voters rejected a proposal that would have limited the amount clinics could charge for dialysis treatments.
On the flip side, the fact that Democrats regained control of the House has boosted hospital stocks and insurers as it is less likely that the Republicans will be able to roll back the Affordable Care Act, often referred to as Obamacare.
On Wednesday, shares of hospitals such as HCA Healthcare (up nearly 5 percent) and Universal Health Services (which gained 2.6 percent) were big winners.
“Gridlock is likely to be a positive for health care stocks,” says Michael Cembalest, chairman of market and investment strategy for J.P. Morgan Asset Management. The reason: On their own, each political party might be more inclined to make more substantial changes to the health care system. “But now that won’t happen,” Cembalest says.
Similarly, with hopes rising for the Democrats and Republicans getting together and agreeing to a spending bill to improve the nations’s infrastructure, stocks of companies that would benefit from a repair of streets and bridges rallied sharply.
Granite Construction, a company that builds roads, highways and bridges, rallied nearly 13 percent, while shares of asphalt and concrete maker Vulcan Materials rose nearly 5 percent.