March 30, 2022
Good morning,
Equity markets overnight were soft as yesterday’s optimism around Russian/Ukraine “Talks” have evidently faded. Military operations continue in Ukraine and show no signs of letup. At the overnight lows, Futures were off half a percent. Now, an hour before the U.S. cash market open, they are off only half that (-25 basis points or -0.25%). Our weeks old equity rally that started primarily in tech names (large cap growth) saw some very healthy and much needed expansion yesterday as the Russell 2000 (small caps) finally got in the game and jumped up +2.65% on the day. The rally still seems to be in go mode – the illusory “talks” notwithstanding.
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Q12022 comes to an end tomorrow; it is surely one that many investors would like to forget. With the S&P 500 correcting as much as 13.1% (as of 3/8), one does not have to look far to understand why: inflation is at a 40-year high, the Federal Reserve is embarking on a tightening cycle, earnings growth is decelerating rapidly, COVID-19 is disrupting supply chains, the pandemic fiscal stimulus has cycled through the economy, and the war in Ukraine risks commodity shortages. However, there is some compelling news for investors coming out of cycles analysis (particularly the 4yr Presidential cycle). I share cycles analysis with readers periodically, not because it plays no role in our investment decision process, but because it is often interesting to see it as a backdrop against the prevailing positioning derived from our investment process.
This year is a midterm year, the second year of a Presidential Cycle and one with a new Democratic President at the helm. The first half of midterm years tend to be weak. The specifics differ from cycle to cycle, but the weakness can be classified under three overarching themes common in midterm years: reduced fiscal stimulus, Fed tightening, and political uncertainty. There are four takeaways from the analysis of midterm years:
• Midterm years have been the weakest of the four, especially under first-term Democrats.
• Weakness tends to be concentrated in the first half of the year. A second half rally would be consistent with both the presidential cycle and non-recession declines.
• The monetary and fiscal policy tightening typical early in midterm years is at record levels in 2022.
• Stock market returns have been weaker when Democrats have controlled the White House and both chambers of Congress.
Be well,
Mike
Sources: Bloomberg and Ned Davis Research