Pro Perspectives 9/14/23






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September 14, 2023

As we discussed yesterday, going into the August inflation report, we’ve had a 30% rise in oil prices and a 55 basis point move in the 10-year yield, all since the end of the first half (the end of June).

Meanwhile, stocks (Nasdaq, S&P 500, DJIA) are left virtually unchanged over the same period.

With the inflation data now behind us, is it time for stocks to make a strong run into the end of the year?  Maybe. 

Stocks are trading at 18.6 times next year’s earnings (forward twelve months).  That’s more expensive than the long-term average of around 16 times.  But it’s cheaper than the average trailing twelve month P/E of the past 30 years (which is north of 20 — even if we exclude the high multiple years following recession).

If we apply a P/E of 20x for earnings expected over the next twelve months, we get a price target on the S&P 500 that implies another 7-8% higher (from current levels). 

With that in mind, let’s revisit the midterm election year analogue we’ve talked about since last November …

Going back to 1950, there has never been a 12-month period, following a midterm election, in which stocks were down.

And the average 12-month return, following the eighteen midterm-elections of the past seventy years, was +16.3% (about double the long-term average return of the S&P 500).

This phenomenon has been playing out.  The S&P 500 opened at 3,750 on November 8th, 2022 (election day).  Today it trades 4,510.  That’s a rise of 20% over the past ten months.

What was the best 12-month period following a midterm election (over the past eighteen periods observed)?  It was under Kennedy.  Stocks rose 31% in the 12-months following the 1962 midterm election.

And interestingly, the worse stocks did in the 12-months prior to the midterm elections (over the 70-year period observed), the better they did after.  In the current case, stocks were down 22% prior to last year’s election.