As widely expected, the Republicans notched a strong win in the midterm elections over the Democrats to take control of the U.S. Senate. Republicans won the majority in both chambers of Congress, the first time since 2006. Held at the mid-point of a president’s four-year tenure, this midterm election result shifts much of the power away from President Barack Obama. The combination now stands Republican Congress and a Democratic President.
Historical data show that equities tend to move up post the midterm elections, irrespective of who wins. Moreover, the trend also coincides with the seasonal gains that markets witness during Nov-Apr period.
It is highly unlikely that markets will buck the trend this time. Markets have defied the historically weak May-Oct period as Bulls dominated. The seasonally strong period and the Republican win now will certainly bolster certain sectors and give mutual fund investors more chance to earn.
Midterm Elections Get Best-Six Month Seasonal Bonus
As already mentioned, a Republican win comes as a bonus during a period which has been historically strong. The trend is popularly known as ‘sell in May and go away’. The 2014 Stock Trader’s Almanac reported that S&P 500 has added 1,663 points during November and April between 1950 and 2012. It also reported that while Dow has added 16,398 points during November to April.
Separately, Standard & Poor's Capital IQ Chief Equity Strategist Sam Stovall notes that since the Second World War, the S&P 500 has added an average 7% from November through April. However, he also mentioned that the S&P 500 has lost 1.6% on average in the May to October period during midterm election years.
Midterm election years thankfully add extra gains to the seasonally strong period. Chief equity strategist from Bank of Montreal notes that stocks have returned 16.3% during the stated period in midterm election years. Credit Suisse notes that since 1930 during 21 midterm election years, S&P 500 has jumped 7.4% in the next 100 days following the Election Day. This shoots up to an average of 17.8% by the end of the year following the elections.
Republican Congress & Democratic President: The Best Combination
Republican’s win has also provided us the historically proven best-case scenario of having Republican Congress and Democratic President.
According to a study by Standard & Poor’s Equity Research, S&P 500 has gained 6% on average since 1901 in years when a president had to work with a split Congress. It increases to 6.2% when the president had to work with a unified Congress controlled by the opposition. This is the scenario we will have next year. Moreover, the combination of Republican-led House and Senate with a Democratic president has led S&P 500 8.6% higher annually.
To begin with the macroeconomic view, a total gridlock disappears. The GOP policy chairman and Senator John Barrasso noted that the gridlock will end as Republicans will control both chambers. House Majority Leader of the United States House of Representatives and the U.S. Representative for California's 23rd District, Kevin McCarthy, also said that the chambers will work together for “one agenda”.
The gridlock has prevailed since 2010 when the Republicans won majority of the House. Republicans had vowed to cease the legislative stalemate that threatened Washington in recent years. They had promised to pass tax, trade and immigration bills and were hopeful of getting them approved by President Obama.
Energy Sector Likely to Gain: 3 Funds to Buy
In the energy sector, the biggest development expected is the end of the impasse over the Keystone Pipeline. A Republican win now is likely to expand the pipeline connecting Canadian oil sands and Gulf of Mexico. There already exists busy trade between the Western Canadian Select hub and the U.S. Gulf Coast.
The Republicans, along with a cross section of Democrats, had been pushing for approval of the pipeline which they feel would pump the U.S. economy with multi-millions in revenues. They also advocated that the pipeline would drag down U.S. energy costs and trim the energy import bill.
Also, domestic natural gas producers are also likely to surge as Republicans may ease restrictions on the export of liquid natural gas. Subsequently, natural gas prices are expected to go up, thereby increasing demand for alternative natural gas sources like coal.
The following funds carry a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) as we expect the funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.
The energy sector has been under pressure mostly due to the slump in oil stocks, affecting the year-to-date returns. So let’s look into the favorably-ranked energy mutual funds with positive returns in the last 4 weeks. They have low expense ratio and do not carry any sales load.
Ivy Energy Y (IEYYX - MF report) seeks growth of capital by investing most of its assets in the energy sector. It invests in energy companies engaged in exploration, production, distribution of energy or alternative energy sources.
The fund carries a Zacks Mutual Fund Rank #1. In the last 4 weeks, the fund has gained 2.9%. The fund has returned 7.1% in the last three years. The fund carries an expense ratio of 1.39% as compared to category average of 1.53%. It carries no sales load.
Waddell & Reed Energy Y (WEGYX - MF report) invests in a mix of value and growth energy stocks. It invests in energy companies engaged in exploration, production, distribution of energy or alternative energy sources. The fund invests across the globe and also in companies available in initial public offerings.
The fund carries a Zacks Mutual Fund Rank #1. In the last 4 weeks, the fund has gained 2.9%. The fund has returned 7.7% in the last three years. The fund carries an expense ratio of 1.09% as compared to category average of 1.53%. It carries no sales load.
Putnam Global Natural Resources Y (PGRYX - MF report) seeks growth of capital. It invests in mid to large cap companies. These companies are involved in discovery, production, distribution of energy or other natural resources. These companies are also involved in developing technologies for the production and use of energy or other natural resources.
The fund carries a Zacks Mutual Fund Rank #2. In the last 4 weeks, the fund has gained 4.7%. The fund has returned a tad 1.9% in the last three years. The fund carries an expense ratio of 0.94% as compared to category average of 1.47%. It carries no sales load.
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