The Weekly Economic & Market Recap
August 17, 2018
The primary election cycle ends in a few weeks. There are only a handful of state primaries remaining with Florida being the most notable. Mid-term elections produce a high level of uncertainty and corresponding heightened volatility. According to recent academic research by Terry March from the University of California, the Dow Jones Industrial Average has produced an annualized return of just 1.4% in the six months preceding a midterm election in contrast to 21.8% annualized in the six months afterward. Domestic equity markets have produced acceptable returns compared to the muted returns that historically precede midterm elections. The returns are especially notable given the uncertainty created by trade tariff concerns. Equity prices in the third quarter have been very good, the DJIA up over 5%, driven by robust corporate earnings and a lessening of trade tensions. According to Thomson Reuters, second-quarter earnings growth for the S&P 500 will be a healthy 24.4%. Roughly ten percent of this earnings growth is related to the tax law change. Nonetheless, double-digit earnings growth and a solidly expanding economy have been very reassuring to domestic investors. A strong dollar and trade tensions, however, have created divergences in global equity markets. Emerging market equities are well into correction territory with the MSCI EM Index down over 14% in the last six months. Financial stress from currency and interest rate differentials are likely to expose economic problems such as Turkey. If the underlying fundamentals remain favorable, the ultimate path will be upward for equity prices.
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