Let’s start today with good news – the midterm election is over.
Well, mostly over. As I write, there are a few undecided seats. But still… No more political commercials. Campaign signs lining our streets will come down. It’s back to normal until 2024.
Don’t get me wrong, I do follow elections closely. Because, contrary to what many believe, I believe they’re closely related to the stock market.
For a long time, politicians liked to say elections are about policy. Talking heads on cable news assured us of it. Lately, the conversation has shifted to protecting democracy from fascism, but that’s beside the point.
No matter what a politician, cable news anchor, or campaign organizer says, election results reflect sentiment above all else. And sentiment, as we know, drives stock market moves.
I’m not alone in that belief. A recent study by an asset manager found that sentiment shifts predict changes in voter responses.
Smart politicians understand this. In 1992, Bill Clinton responded to a heckler with the memorable phrase, “I feel your pain.” Those words marked a turning point in his campaign. Clinton had the support of just 25% of voters when he said that. He won the election seven months later.
Feelings, not policy, may be what pushed Clinton to the White House. The same was definitely true for Trump in 2016. Feelings propelled his candidacy. Strong feelings certainly drove the results of these midterms, from both sides.
Now, since it’s clear elections reflect feelings, we need to consider that stock prices do as well. And if they do, it’s clear that this bear market is far from over.
The Market Is a Voting Machine
There is a relationship between stocks and elections. Historically, if more stocks move up than down the week before the election, the incumbent party wins.
This confirms Benjamin Graham’s observation about how the market behaves in the short term. He wrote, “In the short run, the market is a voting machine but in the long run it is a weighing machine.”
The factor that drives votes in the market (or bullish bets) is the same one that drives votes in elections. It’s sentiment. And right now, sentiment is the worst it’s ever been.
The chart below shows the University of Michigan Consumer Sentiment Index. This index dates back to 1978. It reached an all-time low in June 2022.
(Click here to view larger image.)
Sentiment was higher when inflation soared to double digits in the 1980s. It was higher during the financial crisis in 2008. It was even higher when the pandemic shut down the economy in 2020.
This index is calculated based on the answers to five questions:
“We are interested in how people are getting along financially these days. Would you say that you (and your family living there) are better off or worse off financially than you were a year ago?”
“Now looking ahead — do you think that a year from now you (and your family living there) will be better off financially, or worse off, or just about the same as now?”
“Now turning to business conditions in the country as a whole — do you think that during the next twelve months we’ll have good times financially, or bad times, or what?”
“Looking ahead, which would you say is more likely — that in the country as a whole we’ll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?”
“About the big things people buy for their homes — such as furniture, a refrigerator, stove, television, and things like that. Generally speaking, do you think now is a good or bad time for people to buy major household items?”
Sentiment is important because it drives decisions. If consumers feel they will be worse off a year from now, they will reduce spending. That adds to recessionary pressures. If they decide to defer purchases, that reduces demand and negatively affects the economy. This also affects corporate profits, as Amber Hestla outlined on Wednesday.
Low sentiment readings have been associated with stock market declines in the past. Note the correlation to past recessions, shaded gray on the chart above.
Consumer sentiment has also proven to be a leading indicator, with falls in consumer sentiment occurring before the 1990, 2000, and 2008 recessions. That makes the current reading another reason for investors to worry.
The 2023 Bear Market
Stocks have been in a bear market since February. That’s 10 months. It sounds like a long time for stocks to be in a bear market, and it technically is. We passed the average length of a bear market a few weeks back.
But I believe we haven’t seen the worst of this bear market yet. The Federal Reserve will keep hiking interest rates to tame inflation, which will keep weighing on stocks. This will keep slowing the economy, and potentially not fast enough to encourage the Fed to pivot.
High-profile layoffs have already begun at the major tech giants. Smaller, lesser-known companies are next.
We’re facing potentially years, even decades of tough times as an investor.
That is, if you continue to invest your money the same way you have for the entire bull market.
I’ve been preparing for this moment over the last few years by perfecting a trading system that’s built for bear markets. By making just one trade a week, and quickly closing those trades for large profits or small losses, my system proves it’s possible to buck the trend and make money no matter what the market does.
My subscribers are up 78% this year using this system, with stocks down 20%. That confirms the system works exactly the way I want it to.
That’s why on Tuesday, I’m fully unveiling the latest iteration of my one-ticker trading system, and inviting you to come see how it works.
I highly encourage you to sign up by clicking right here, and learn just how much money there is to be made in this bear.
Michael Carr, CMT, CFTe
Editor, True Options Masters