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Given October’s significant volatility in financial markets, and the lead-up to the November US mid-term elections, can history tell us anything useful about the likely future direction of equity markets from here?
Right now, markets are contending with a number of negative overhangs, including but not limited to high debt levels, rising interest rates, trade friction between the US and China and reduced central bank liquidity. However, despite that, American companies are actually performing very well, with third quarter earnings and revenue growth among S&P 500 companies looking to exceed expectations.
For Q3 earnings season, around 80% of all S&P 500 companies have now reported their earnings with Earnings Per Share growth likely to come in around 25% over the prior quarter one year ago, surpassing estimates for 19.3% growth, while revenue growth is likely to come in around 8.5% versus estimate for 7.8%.
This is all happening at a time when we are now beginning to move out of the worst performing months of the year and into some of the best performing months of the year.
So what about the Mid-Terms? Well since 1946, there have been 18 US midterm elections. In each of these instances the US stock market was higher 12 later after every single one of them, regardless of the outcome. Even more encouraging is the fact that on average, they weren’t just a little bit higher, but a lot higher, averaging returns of 17%, according to a report by RiskHedge. On the other hand, in the lead up to the mid-terms, from January to October, the US equity market is normally subdued, down by an average of about 1%.
This could be the result of the political uncertainty that is created leading into the election, and that uncertainty being removed. Regardless of the reason, while nothing is guaranteed in the financial markets, it’s another solid sign of better times ahead.
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