This time, stocks got it right


NEW YORK • For once, the consensus came true. Markets got it right and no violent repricing in equities was needed. A divisive episode of US politics came and went, and investors are exactly where they were before. The question for bulls: Can it actually last?

“This was our base case,” said Ben Phillips, CIO of EventShares, which oversees the US Policy Alpha ETF.

“As far as markets are concerned, it is actually a decent outcome.”

Perhaps. Bulls can celebrate gridlock, at least, a moderate positive in cycles past. They can be encouraged that something other than a Republican sweep is being taken in stride by futures. The economy is intact. And nothing that happened on Tuesday will alter President Donald Trump’s big gift to bulls, a tax cut that made 2018 one of the best years for profit growth ever recorded.

“I know it may be a bit of a let down from a news perspective, but most of us on the investment side are happy to see a bit of boring and predictable politics this year,” said Max Gokhman, head of asset allocation for Pacific Life Fund Advisors.

Still, questions remain. How long can any peace persist in a market that before this week spent a month going up and down 2% a day? The election is over, one type of uncertainty is subdued. But for equity bulls who watched as their favourite stocks got pummeled by forces that went beyond politics in October, it’s an uneasy truce.

“This issue, thank god, is behind us,” said Donald Selkin, chief market strategist at Newbridge Securities, said in an interview. “But the other issues are out there.”

Futures on the S&P 500 were up 0.7% as of 4am in New York yesterday.

It was a stark contrast to last week, when equities finished their worst monthly plunge since 2011.

That’s the issue for investors, though — that an end to electoral strife doesn’t ensure an end to everything else that tore at investor nerves last month, when US$3 trillion (RM12.51 trillion) was erased from shares. The US Federal Reserve is still raising rates, Trump’s trade war shows no sign of easing, and little will arrest the gnawing sense the economy’s best days are behind it.

Add to that a more abstract threat — “tweet risk”, it’s been called — the possibility that a recharged Opposition will turn the screw on Trump’s vulnerabilities, provoking the president into an even more warlike public posture than he already presents.

It’s an unsavoury thought for anyone who traded through the president’s pre- and post-market pronouncements as his tariff threats ramped up.

On election night, most investors were happy to put those concerns aside. The economy may be peaking, but for now it’s humming along at a 3% clip. Earnings growth will slow, but earnings aren’t: The estimate is for 10% gains in each of the next two years. How bad could things be, when after falling 9% in October, the Nasdaq 100 is still up 9% on the year?

Even more: In the past 18 midterm elections, stocks have gained from the October lows through the end of the year every single time, according to LPL Research.

One optimistic spin holds that October wasn’t an isolated event that was separate from politics. It was politics, the theory goes — tonight’s election outcome pricing itself in a month in advance. Under that interpretation, bulls can take solace: The Dow Jones Industrial Average’s 2,000-point correction was the price stocks had to pay for a Republican setback.

At Apriem Advisors in Irvine, California, CIO Benjamin Lau lowered cash to 15% from 20% just before this election, buying financial and industrial shares to take advantage of cheaper valuations.