In the middle of the 2018 midterm election season, it is but natural to wonder whether it will impact the stock market. Historic data have shown that the midterm election have provided some additional steam to the broader market. And this should make investors optimistic especially after a volatile stretch during the month of October. Needless to say, that the U.S. economy is also on track for a mind-blowing year that could come teasingly close to a 13-year milestone.
Given such positives, investing in sound stocks that can make most the stock market’s upward journey particularly after a midterm election seems prudent at this time.
Midterm Elections Bode Well for Wall Street
The U.S. stock market, which is slowly but steadily finding its footing after a brutal October, must now brace for the effects of midterm election. Tuesday’s election is widely expected to see Democrats gaining control over the House of Representatives, while Republicans will probably retain control of the Senate.
Now, the question looming large is whether gridlock in Washington will prevail. The possible answer is yes. But, it won’t necessarily weigh on the equity market or real economic growth. Instead, it is widely expected that the equity market will gain momentum post-midterm.
Per a research by S&P Capital IQ, the S&P 500 has gained on average 15.3% in the six months following midterm election in the third year of a given presidency, which is incidentally this year. The research also showed that the frequency of advance (FoA) for this occurrence was 94% of the overall time period of Oct 31, 1944–Sep 29, 2014.
(Source: S&P Capital IQ)
Analysts at UBS added that the broader S&P 500 has always rallied an average of 14.5% from the end of August to the end of March during midterm election years. If you break up the span, the index has declined 1.4% from the end of August through early October followed by a rally through year-end into the next year.
LPL Financial, at the same time, said that the S&P 500 averages a healthy 10.6% gain in midterm years from October through December. Stephen McBride, the editor of RiskHedge report, also chipped in and said that stocks have climbed an average of 17% in the year after a midterm election since 1946. He too acknowledged that it’s the third year of a presidential term and that is historically the strongest year for the stock market.
Last but not the least, the stock market also, historically, gains in the November-through-May period, or the so-called “winter” months, while markets have been more or less flat during the “summer” months (May-October). For instance, the Dow Jones has registered an average gain of 7.5% during the November-April period, while the blue-chip index yielded a meager 0.3% in the May-October period.
U.S. Economy in Good Shape
But, why just rely on historic trends? The U.S. economy is doing well and that should eventually help the stock market gain traction. In the last two quarters, the U.S. economy recorded the fastest six-month growth in four years and is on track to hit the Trump administration’s annual growth target of 3%. If that happens, it would be the best yearly performance since 2005, two years before the Great Recession.
The U.S. economy got a boost in the third quarter, with GDP increasing at an annualized pace of 3.5%, per the U.S. Commerce Department. In fact, the country’s total output of goods and services followed an even stronger 4.2% growth in the second quarter.
5 Top Picks
Following the sharp correction in October, the stock market is well poised to move north mostly after the midterm election, to be held on Nov 6. A late-year spurt may as well be on the cards for stocks banking on solid economic growth.
Thus, investing in sound stocks that can make the most of such positives seems judicious. Such stocks are none other than those that flaunt a Zacks Rank #1 (Strong Buy) as well as a VGM Score of A. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
AVX Corporation (AVX - Free Report) manufactures, supplies, and resells various electronic components, interconnect devices, sensing and control devices, and related products. The Zacks Consensus Estimate for the company’s earnings rose 11.6% in the last 60 days. The company’s expected earnings growth rate for the current year is 80% compared with the Electronics - Miscellaneous Components industry’s projected rise of 16.6%.
RH (RH - Free Report) operates as a retailer in the home furnishings. The Zacks Consensus Estimate for the company’s earnings rose 0.1% in the last 60 days. The company’s expected earnings growth rate for the current year is 150.2% compared with the Retail - Home Furnishings industry’s expected rise of 12.6%.
Herbalife Nutrition Ltd. (HLF - Free Report) develops and sells nutrition solutions. The Zacks Consensus Estimate for the company’s earnings rose 3.6% in the last 60 days. The company’s expected earnings growth rate for the current year is 17.3% compared with the Retail - Pharmacies and Drug Stores industry’s projected decline of 3.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Lumentum Holdings Inc. (LITE - Free Report) manufactures and sells optical and photonic products. The Zacks Consensus Estimate for the company’s earnings rose 3.2% in the last 60 days. The company’s expected earnings growth rate for the current year is 19.9% compared with the Lasers Systems and Components industry’s estimated rise of 2.6%.
Methanex Corporation (MEOH - Free Report) produces and sells methanol. The Zacks Consensus Estimate for the company’s earnings rose 5.6% in the last 60 days. The company’s expected earnings growth rate for the current year is 63.7% compared with the Chemical - Diversified industry’s projected rise of 14.2%.
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