In the past few weeks we’ve seem the market become increasingly volatile. At the same time, we had the worst month since 2011. Tech and industrials led the decline. There have been varying reasons for this volatility and turmoil. I’ve heard rising interest rates, weak corporate guidance, and trade to name a few. In my opinion we are experiencing pre-election jitters. According to “polling” data, Democrats have a strong chance to take the House of Representatives. Since the end of WWII the party which holds the presidency has historically lost seats in the midterms. Unfortunately, the so-called “favorite” to win this election is openly talking about how they’re going to damage the economy. This likely has many investors spooked.
The stock market and business community are discounting mechanisms. If Democrats win, businesses and the market will continue pricing in a socialist regime for 2020. They will hold back on buying new equipment, hiring additional workers, or developing new products. Instead they will pay off debt, invest in automation, focus on cost cutting, hoard cash, and hunker down for a slowing economy. The Democratic platform is calling for a $15 minimum wage, a repeal of the corporate tax cuts, free college tuition, additional regulations, and nationalized healthcare. From a personal perspective, if someone came up to me and said I was going to make A LOT less money next year, I’d feel frugal too. I’d avoid any large purchases and focus more on paying off my house (debt) before the inevitable.
Fortunately, I don’t think this is the case. Republicans currently lead in early voting, polling data was wrong in 2016, and the economy is incredibly strong. For me, my income increased by 20% because of the tax cuts. Withholdings are lower, I received a raise, and customers and putting in larger orders. According to the latest jobs report, many others are experiencing the same. Therefore, how could any reasonable person vote Democrat? This question doesn’t even take into account the lunacy in the media on a daily basis, the violent protests, and horrific confirmation fight over Brett Kavanaugh. Overall, because circumstances in the U.S. are improving, I believe Republicans have a good chance at holding on to Congress.
So no, I don’t think interest rates, trade, or guidance have much to do with the latest market correction. After all, interest rates can be cut quickly if the need arises. Progress has been made on trade and corporate guidance revisions have been relatively modest. Investors are simply skittish over the 2018 midterm elections and whether or not a socialist administration is imminent. However, I think this fear is misplaced. People tend to vote with their wallets. In this case, wallets are getting fatter and unemployment is near a 50-year low. With that in mind, I could be making a few extra purchases in November. Investor fear has created an abundance of opportunity in several quality companies.