Stock Market Fluctuations Highlight Bets on 2018 Midterm Election Results…

This is not financial advice. CTH simply explains economic influences and how they show up visibly in various KPI’s.  This is not financial advice.

The current Wall Street stock market sell-off is (in majority) mostly an outcome of investors betting Republicans are going to lose the House of Representatives and the MAGA economic policy will be blocked by a Democrat controlled House.

The U.S. Stock Market is factoring in a House of Representatives election loss for the Trump economic agenda.  Predictably, Democrats will target the administration with legislative challenges, investigations and court cases focused on regulations and tax policy.

Democrats have announced their intent to target President Trump cabinet members for investigations; the administration will be bound up in committee oversight; Trump’s family business interests and taxes will be part of a renewed investigation; and all of the MAGAnomic policy will immediately stop amid the reistance.  That’s the reality.

From the perspective of 5-year-view investors: If you think the 2018 mid-term election will result in a Democrat controlled house of representatives; with Adam Schiff as Speaker; then getting out of the market is not an unreasonable position.

However, for those who estimate the 2018 mid-term election will result in Republicans retaining control of the house of representatives; with either Kevin McCarthy or Jim Jordan as speaker; then now through election day is the time to buy-in to the market.

If the GOP keep the house, all current year stock sell-offs (drops) will be made up on November 7th, 2018 (likely within 48 hours) as they were in the aftermath of the 2016 presidential election.

Obviously there are other factors…. Obviously, this big picture aspect is simplistic; but the 2018 midterm election result is the largest current dynamic influencing market fluctuations.  There are billions at stake.

Those who think Democrats will win are selling (Wall Street). Those who think the GOP will win, and retain the house, are buying/holding (Main Street).

It is a weird, yet simple, year.

 

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287 Responses to Stock Market Fluctuations Highlight Bets on 2018 Midterm Election Results…

  1. cthulhu says:

    Once upon a time, companies used to evaluate possible actions by calculating an Internal Rate of Return. They’d look at a series of cash flows over time and figure out what discount rate they implied. For instance, you’d borrow $5,000 today and buy a piece of equipment. You figured that that piece of equipment could use $200 of parts each month and make widgets that could be sold for $340. At the end of 10 years, the equipment would be worthless and you’d have to scrap it. Interest was going to be $50/month as long as you had the machine (12% simple interest), but once you scrapped it, you’d have to pay back the $5,000.

    At the end of 10 years, assuming all went according to plan, you’d have trashed a $5,000 machine, paid back the loan, paid $6,000 in interest, bought $24,000 of parts, and made a net profit of $5,800 — almost exactly the amount paid in interest.

    Your company’s management would look at IRR as a way of deciding between projects — dumb ones had a lower IRR and smart ones had higher IRRs, and they’re keyed off of interest rates. If you had a decent IRR (as in the example above) at an interest rate of 12%, it was a *GENIUS* IRR if the interest rate were 6%. The interest rate, then, is like a sharp knife to separate the brilliant from the stupid.

    What we have done in the last few years is indulge in a plethora of stupid behaviors. Socialized medicine; a bullet-train to nowhere; “thrown” lawsuits with settlement payouts to leftist thugs; technology transfer to the Chinese; the Iran nuclear deal….I could easily go on. The sharp knife of interest rates and expected returns could have divided these projects from the more usual elements of having a functional republic — free and fair trade, the equal administration of justice., etc. Imagine having to justify environmental regulations on a cost/benefit basis, for instance. Healthy interest rates must return in order to make this guidance clear.

    Unfortunately, it has not only been the government indulging in such stupid behaviors. And, that, sadly ensures that there is half-baked “malinvestment” riddled throughout the real economy. Whether this is $80,000 college degrees in “Critical ethnic Studies” that make one suited for $20,000 barista positions for life, bird-killing windpower installations, or — dare I say it? — Tesla…..it all needs to be recognized as the value-destroying dumpster-fire that it is. With rising interest rates, pretending is no longer an option — and that’s why they have to rise.

    Liked by 5 people

    • starfcker says:

      Chulthu, dare I say it again, better look at Tesla again

      Like

      • cthulhu says:

        We’ll all find out in the long run. I’m a big fan of physics, however, and I’ve made the drive from the SF Bay Area to LA and back several times.

        Mind you, the government is not a big fan of reality, and they have their thumb on the scale. There are government subsidies for purchase. If you don’t sing their tune, you are relegated to the back of the bus — oh, wait, that’s buses…..you’re relegated to the crowded right-hand lanes of highways. There are marked off close-in parking places for Teslas, and there are wildly subsidized charging stations. If you want to pull a permit for a business remodel, you are required to paint special Tesla parking spaces even if your business is actually Suburban Propane.

        And, yet, cars with the biggest five-year drop in value tend to be electric. It’s almost like the old days of planned obsolescence. Maybe, but maybe, it’s not a technological miracle — maybe it’s a financial miracle to have you buy a new car every five years and live perpetually in debt.

        Mind you, they government is subsidizing Nissan Leafs and Teslas up the wazoo — and, certainly, additional taxes on liquid-fuel engines is not far behind. Nor are government mandates — Jerry Brown wants it to be illegal to purchase a new gasoline-powered car after 2035. I can only imagine the way insurance will be used to force everyone into self-driving vehicles.

        None of this makes Teslas actually work better to meet peoples needs.

        Liked by 3 people

        • Cuppa Covfefe says:

          Exactly. Teslas are only viable in areas that do not suffer from snow or seriously inclement weather, and that have the expensive infrastructure to support them. Not to mention they are extremely expensive.

          Here in Germany, a study was done about how an electric vehicle would fare in freezing weather, at night, in a blizzard, in a traffic jam, with the temperature at or below freezing.
          The results, unsurprisingly, were dismal, at best. Another researcher considered the “über-green” possibility that all of the rescue and assistance vehicles were ALSO electric, with their capacity and range also curtailed by the conditions.

          There would be a lot of deaths by freezing. The greens do not consider this, as they generally never got beyond 100-level science classes, and, in general, don’t consider consequences of their ill-conceived decisions, rather they stick to their agenda, come hell or frozen water…

          And that’s not even considering the perils of Lithium and other rare-earths that are needed for the batteries of these vehicles, which, when flat must be replaced at great expense (and yes, I know Teslas have electronics that are are supposed to prevent this).

          I drove SF to LA in the 1970s every third weekend, and I would never even consider doing it in a vehicle that had to be charged half way down. I sincerely doubt Highway 99 would ever get the charging stations it needs; Interstate 5, perhaps; and 101/1 possibly, but that route is a few hours longer and subject to massive traffic jams. Oh, wait. There’s always Governor Moonbeam’s Bullet Train to Nowhere 🙂

          Liked by 3 people

          • budklatsch says:

            At the local ski mountains here in Vermont, the primary close in parking just after the Handicap parking are the charging stations for Tesla et al. Never see a vehicle in the winter charging at these stations.

            Liked by 1 person

          • DGC says:

            Serious question: can you provide the specific German study you referenced? Would love to read the technical details of the study.

            Liked by 1 person

        • dobbsfan says:

          That’s an interesting read right there.

          Like

      • Daniel says:

        Tesla vehicles are not viable for anything but local driving or use at the golf course. The infrastructure isn’t in place and isn’t even close to being standardized.

        Like

      • 6x47 says:

        I saw a fascinating analysis of what Elon Musk is really doing with Tesla. He is creating an “ecosystem” of electric cars and charging stations – and the real goal is to control the market on charging stations including home power storage. The Tesla cars are merely a means to create the demand for his infrastructure. Musk is trying to disrupt the electric industry and be to the 21st century electricity what John D. Rockefeller was to petroleum in the 19th century.

        It’s an interesting theory – but in my opinion, he’s going to fail because the whole system is based on battery storage. An inefficient technology, which unlike petroleum is a worse option.

        Like

    • Steve in Greensboro says:

      Cthulu, I agree with your note, but would add the following.

      Of all the stupid things that governments do, the most destructive is artificially depressing interest rates. Since the Great U.S. Housing Bubble Collapse of 2007-2008, the US Federal Reserve massively expanded the money supply to try to revive the economy by depressing interest rates and making a great many more otherwise bad investment projects look like “genius”.

      These projects will eventually be cleared out via bankruptcy, with great wailing and gnashing of teeth. Some, like Tesla, which will just be gone, leaving a bunch of expensive and unmaintainable golf carts. Others, like investments in the oil patch, will at least leave us producing oil wells.

      Of course, the US economy did not start to revive until election night 2016. Nothing to do with interest rates. 100% Trump. All it took was the expectation that Trump would lower corporate taxes and remove a lot of destructive regulation, which has done and will continue to do through at least 2024. (I’ve got a link to a presentation by Kevin Hassett below which more or less proves that assertion.)

      Like

      • Daniel says:

        Government does not suppress interest rates. Who sets the interest rates? Are they government?

        Like

        • DGC says:

          Congress has essentially given that authority to the Federal Reserve, who manipulate the money supply to maintain an arbitrarily-defined, target interest rate.

          Or are you suggesting that markets currently determine interest rates? You’ll forgive some of us if we recognize that Wall Street chooses to NOT fight the worlds’ central banks to let markets actually determine interest rates.

          Liked by 1 person

    • Rgt says:

      Excellent point. With artificial interest rates to the extent of actually flirting with negative rates, the globalists attempted a form of alchemy. Similar to opioids, a deteriorating economy was masked by free money throughout the previous administration. However Trump is not a politician only concerned with surviving the next election cycle, but rather a businessman who understands the role of interest rates in governing prudent and successful investment. Fortunately his policies have strengthened the economy to endure the cold turkey associated with returning to economic reality. At least that is my hope.

      Like

  2. No worries.

    Liked by 13 people

  3. DJ says:

    I would very much like to share with all of you exactly what the market is going to do in the next few days and weeks. But last weekend I took my crystal ball into the repair shop for its annual flux capacitor upgrade. Yeah, bad timing on my part… Sorry.

    Liked by 2 people

    • TarsTarkas says:

      So you are the one who stole the flux capacitor out of my model 40! I’ve been stuck here for WHO knows how long trying to find it or build a replacement!

      Like

  4. dallasdan says:

    Current odds in LV regarding the House election outcome are:

    “All 435 House seats are up for grabs this November, and, like in the Senate race, stakes are high given the current political climate. Bovada (55.6% implied probability) and Smarkets (51.6%) have the Democrats as slight favorites to win the House, while PredictIt (67.0%) is more bullish on their odds. Per PredictIt, the market suggests there’s a relatively high 9% chance of the Democrats winning in a landslide — 251 or more seats.”

    https://www.actionnetwork.com/politics/2018-midterm-election-odds-democrats-favored-over-republicans-house-of-representatives

    Combine the betting odds with the substantial stock market sell-off described by SD as an indicator of the “smart” money expecting the Dems to win the House and you have a frightful combination. Such a result would scuttle the President’s agenda and savage him and his supporters within the administration. Any intelligent person should pause and contemplate the disastrous results, as SD does.

    I know this information is entirely speculative, and as equally predictive as Hillary’s polls, but not to recognize the real possibility of losing the House and, subsequently, the President’s agenda for at least two years is naive. It’s why the President is campaigning 24/7. He knows a DEM controlled House will derail his administration.

    I’m going to vote, pray, and buckle my seat belt. The importance of the electoral outcome is genuinely, incalculably great.

    Like

    • Daniel says:

      I fail to see the impetus for such a change at this time. What would “the cause” be for anything to change in the Democrats’ favor? Where did they succeed? Where did they look more appealing than Republicans?

      Like

  5. TreeClimber says:

    Husband and I went in to do early voting today, in case he’s working on Election Day and we can’t make it. He voted a straight party ticket (Republican,) I browsed but ended up voting almost straight party (no R candidate for our State House rep, so I went with the libertarian.)

    Liked by 5 people

  6. JOSEPH ANGEL says:

    ‘DemocRATS– Hey, that’s how we roll.’

    Like

  7. Payday says:

    Four of my family voted straight R today. One more on Saturday. But it is Illinois. Even Fivesomes don’t tend to move the needle…

    Like

    • dobbsfan says:

      I am in Illinois…..me and my family will be voting straight R on Nov 6. If there are no R candidates, no vote at all.

      In this life, I will NEVER vote Dem again.

      Liked by 1 person

      • peace says:

        I’m in Illinois too and wish I was going to the really Saturday; however, my hubby and I will vote straight Republican and hold our noses while voting for Rauner and Roskam.

        Like

  8. dallasdan says:

    Election projection from LV on the House:

    ” All 435 House seats are up for grabs this November, and, like in the Senate race, stakes are high given the current political climate. Bovada (55.6% implied probability) and Smarkets (51.6%) have the Democrats as slight favorites to win the House, while PredictIt (67.0%) is more bullish on their odds. Per PredictIt, the market suggests there’s a relatively high 9% chance of the Democrats winning in a landslide — 251 or more seats.”

    https://www.actionnetwork.com/politics/2018-midterm-election-odds-democrats-favored-over-republicans-house-of-representatives

    Combined with the stock market’s “smart money” sell-off and SD’s caution, the potential of losing the house is real in the minds of many. I hope their logic is as misplaced as Hillary’s msm sycophants.

    The President knows the balance of his present administration is hanging by a thread. He is a magnificent campaigning machine.

    I will pray, vote, pray, and buckle my seat belt, right next to my friend Gentleman Jack.

    Liked by 1 person

    • Eilert says:

      Look around you. Do you really see a Blue Wave coming or is this just manufactured like 2016.

      Liked by 1 person

      • dallasdan says:

        No, I don’t.

        However, I accept SD’s assessment that the stock market drop may be a legitimate indicator of smart, “heavyweight” investors believing the Dems will take the House. The LV people are less concerning since they want the betting to be 50-50.

        I appreciate your point about the manufacturing of an expectation, ala 2016. The “big cigar” traders on Wall Street, where I worked for four years before medical school, are known to artificially create large swings in stock values and make large returns on both the downturns and the rebounds. I’m suspicious that this strategy is in play, using the midterm elections as cover. I dunno.

        Liked by 1 person

        • Cuppa Covfefe says:

          And their master, Satan Soros, the man that broke the Bank of England, is the biggest manipulator of all…

          Like

        • sweepyjeff says:

          Agreed. The market is usually correct and relies on sources like the NYT, 538, etc. But, sometimes these sources are wrong. Remember when Carl Icahn went home early from the election night festivities to completely CLEAN UP on futures?

          Like

        • Daniel says:

          That or they just love selling high only to buy it back again low.

          Like

        • Rgt says:

          Excellent point. After the 2008 economic crisis I was watching the markets tank until early 2009 when on CNBC someone called the bottom. He was right and a lot of money was made in the ensuing years. I doubt it was the individual investors who were incredibly burned by the crisis and swore off getting back in to the market or didn’t have the capital left to reinvest. But the pros got in and with a compliant FED reaped the profits. It is possible they need another opportunity to dump and pump. There are a lot of old sayings. Blood in the streets and the like, but talk is cheap and it takes guts to put your money on the line. Manipulation is a fact of investment life made worse by former President Clinton’s allowing the big banks back in the game. They like volatility.

          Liked by 1 person

  9. Paula Daly says:

    When the market is down, buy more. Investing is long term. Please don’t take your money out. Just like with all the downturns, the market turns around with elections or with help from the Federal Reserve, infusioning it with cash like after the 07 housing crisis and ever other one. Just stay the course. Not saying the Fed is good, just that’s how it works. Don’t worry about things you have no control over, it will drive you crazy. Vote Red!

    Like

  10. Throwaway the key says:

    The PPT (plunge protection team) has stopped buying futures because they are offended by Trump’s jawboning the Fed. Trump is right, the Fed is fighting Trump’s dismantling of globalism under the guise of inflation.

    Liked by 1 person

  11. Fred Ward says:

    This echos my thoughts. I bought a chunk yesterday.

    Like

  12. I don’t necessarily agree with SD’s take on the market recent declines. Keep in mind that the big cap stocks that dominate the averages are for the most part multinationals and Wall St banks. The Dems and the nevertrump GOPe for the past two years have shielded these blue chips from most of Trump’s nationalist/anti-trust/pro-worker agenda while allowing benefits from the business tax cuts. So it was upside for these companies without the downside of needed reform to their obviously globalist and parasitic business models.

    Up until recently the market was pricing in the Dems regaining the house and continuing to check the President in this manner. But in recent weeks and with early voting looking like a landslide R midterm, reality is starting to set in with multinational blue chip stock investors and speculators. These stocks have such huge capitalization that they dominate the averages. I expect if the red wave hits with full force in Nov that we’ll have a bear market on our hands. But I also believe there’s no way to avoid one if we want our country to reinstate a nationalist economic model with domestic companies falling in line to treat the blue collar workforce fairly again. Changing economic models is going to bring a lot of pain that we are going to have to weather through to get to the prosperity and stability on the other side.

    Liked by 1 person

    • railer says:

      Good post. I also agree that these DOW swings are market fundamentals at play, and that the tech, financial and multinationals are the ones taking the DOW hit here, and that this is a necessary and expected correction. The 40% rise in the DOW after Trump’s election was to be expected, but it was also “irrational exuberance”, and over the longer haul of 2-3 years and more, it’d average out to a more rational DOW rise, encompassing the tectonic shifts that are accompanying MAGA.

      I believe that interest rates are a trigger to this, and that the precipitous increases have accelerated the DOW swings. Like Trump, I’d rather see a gradual rise, but really 1% day swings in the DOW are not actually troublesome, they’re just mildly scary. But fear is a healthy thing, and brings investors around to more rational action, which is a necessary outcome of MAGA. So the interest rate hikes might be better managed, but they must occur. And that they negatively impact techs, financials and multinationals isn’t troublesome to me or MAGA, I believe.

      The entire Swamp and Uniparty are attached to the techs, financials and multinationals, not just Democrats. If you’re looking for a political component to these market swings, it’s not just Democrats, it’s MAGA against the Uniparty. I believe the Uniparty and Swamp realizes that MAGA isn’t the political anchor that they’ve shrieked it was, and that MAGA will be strengthened by the coming election, not weakened. The market may be responding to that, at least partially. But remember, McConnell and Ryan would rather otherwise, it isn’t just the Democrats.

      The Uniparty and Swamp both realize the hidden political reality, which maybe even some in here find repulsive. Pelosi’s return as Speaker of the House ENSURES Trump’s reelection in 2020. That is to say, Pelosi ENSURES that MAGA continues apace. Presidents are strengthened by identifiable opposition, particularly if it’s a shrill hag like Pelosi. Remember, McConnell and Ryan are MAGA’s enemies, not just Pelosi. It’s much simpler to operate when your artillery has a free fire zone, wherein you don’t have to hold fire because you might hit one of your “allies”.

      This election is turning in MAGA’s favor, no matter how it goes and who controls the US House. Trump will not be wiped out as the Uniparty claimed, he’ll be strengthened. The market now sees this clearly, and they’re scrambling to rearrange themselves. They’re acting rationally, for perhaps the first time in decades.

      Liked by 1 person

  13. i'm just sayin'.. says:

    Have voted, am holding and will probably dip my toe in the buying pool in the coming days…..

    Like

  14. Doug Amos says:

    So, other than their dislike for President Trump, just what is the democratic platform that they are running on that is going to win them all these seats? Or is this just them knowing that the election is going to be fixed?

    Like

    • sweepyjeff says:

      Their latest platform is stopping Republican mail bombers. Sadly, this may have some legs. It stopped media coverage on “The Caravan” cold and also the coverage of the drop in polls for Dems.

      Like

  15. Patriot 1 says:

    If any of this is true you can bet the only people who think the democrats will get control of the house are democrats or people in cahoots with the democrats.

    Like

    • sweepyjeff says:

      Anyone who knows politics knows it is a dirty business. Thankfully, we have someone that Fle calls an “apex predator” handling the R end. But don’t discount the effectiveness of dirty politics. Public opinion is easily swayed.

      Like

  16. JonS says:

    Right now the smart investment is in your local candidate’s campaign

    Like

  17. DJ says:

    Okey dokey then, I agree that the outcome of the election is one factor in the current market situation, however the market is rarely one dimensional. Here is a list of items currently impacting broader market decisions – including the aforementioned item:

    – Policy mistake by the Federal Reserve
    -Rising interest rates that could make borrowing more expensive
    – A slowdown in global economic growth exemplified in China weakness
    – An overall breakdown in stocks, represented in equities trading at multimonth lows
    – Midterm election jitters, which have seasonally resulted in some jitters in U.S. markets
    – Seasonal October volatility, which has tended to translate into choppy trade
    -Worries that the U.S. economy is in the late stages of its expansion and due for a recession
    – Brexit
    – Italy’s budget crisis
    -The looming end of quantitative easing in Europe
    -The political implications of the killing of dissident journalist Jamal Khashoggi
    – Worries about the health of emerging markets outside of China.
    -Signs from U.S. companies that they are see earnings growth slowing
    -U.S.-China trade relations which may be exacerbating Beijing’s economic malaise
    -Growing deficits partly derived from President Donald Trump’s corporate tax cuts in 2017
    -Weakness in the banking sector which hasn’t benefited from rising interest rates
    -Softness in transports which Dow theorists tend to follow as a gauge of the health of the market
    -A rotation of investors out of growth stocks and into those names viewed as value
    -Major cracks in the housing market
    -A weak earnings outlook

    List from here: https://www.marketwatch.com/story/why-the-dow-tumbled-600-points-and-the-nasdaq-fell-into-correction-territory-for-the-first-time-in-2-years-2018-10-24

    Like

    • railer says:

      The “correction territory” you speak of is a necessary outcome of MAGA. It is the market responding to MAGA, as opposed to the market driving incorrect politics as we’ve seen for quite some time, which is what brought on this need for a “correction”. The correction is a good thing.

      Like

  18. NJ Transplant says:

    You are right, Sundance. I have been watching Bulls and Bears – David Asman’s new show. The Wall St. people on the show were saying that corporation earnings are up so the drops make no sense unless they are connected to Chinese tariffs. They didn’t seem to think that was enough of a reason.

    The other day, I told my husband that I am going to stop looking at my stocks until after the election. I really think it is election related. If the house goes Dimm, stocks will sink like a stone. If the R’s hold on, stocks will go up again.

    Like

  19. 6x47 says:

    “Fluctuations”

    A Chinese tourist comes to visit America. Upon arrival he exchanges his RMB for US dollars at the rate of 7:1, but on leaving he finds the exchange rate is now 6:1 and he’s lost 1 RMB.

    The Chinese man is very irate to lose money and demands an explanation. The man behind the counter tells him “fluctuations.”

    The Chinese man retorts: “Fluck you too round eyes!”

    Like

  20. Davidk says:

    While I don’t disagree with your analysis, part of this too is that the Federal Reserve has been raising interest rates which turns off the free money spigot for Silicon Valley companies and others. At least part of this stock market is credit fueled expansion…make that credit more expensive, and the stock market will fall.

    Like

    • para59r says:

      Add in to that, the Fed has been vocal about future raises. Something I don’t remember happening under Greenspan. It ends up multiplying the effect.

      Like

      • para59r says:

        It used to be all gooblygook talk till wham they’d hit you with a surprise and then back to gooblygook talk as they evaluated their effect before hitting you with another surprise.

        Like

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