Wall Street sees best rally after midterm election in over three decades, as a congressional power divide eased fears about abrupt changes in policies that could easily hurt corporates. And with the United States economy on track for a mind-blowing year that could come seriously close to a 13-year milestone, the stock market seems to be in good shape. Thus, investing in solid stocks that can make the most of the current positives seems judicious.
Best Post-Midterm Rally Since 1982
As widely expected, the Democrats gained control over the House of Representatives, while Republicans retained control of the Senate. The results, thus, delivered a split Congress and a legislative gridlock for the remaining two years of President Trump’s tenure.
Stock market bulls cheered the outcome. After all, things aren’t that bad in case of a divided Congress. Although the markets did get a nice pop in anticipation of tax reforms, the recent trade-related issues have been a dampener. Consequently, Democrats controlling the House of Representatives will no doubt compel Trump to tone down his hawkish trade policy stance.
The Dow Jones finished nearly 550 points higher, or 2.13% on Nov 7 and registered its best one-day climb since Oct 16. The broader S&P 500 climbed 58.43 points or 2.1%, its third best day of 2018. The Goldman Sachs Group, Inc. (GS - Free Report) further noted that Wednesday marked the biggest post-midterm gain for both the Dow and the S&P 500 since the day after the 1982 contest, when both the bourses rose 4.3% and 3.9%, respectively.
There are, in fact, a lot of similarities between the 1982 midterm election and this year. Needless to say, 36 years back, Republican president Ronald Reagan had majority in the Senate, while Democrats controlled the House.
Stalemate in Washington: Good for Stocks
Since 1928, stocks have always generated an annual average return of 12% in years when a Republican president held office, while Congress was split between the red wave and the blue wave, per Bank of America Merrill Lynch. And in the year after the midterm election, returns on average have surged more than 20%.
(Source: BofA Merrill Lynch)
Goldman further added that where Democrats control the House and Republicans’ the Senate, the S&P 500 is widely expected to gain 20% on average in the following one-year period. Meanwhile, if Republicans had won the House and Democrats the Senate, the S&P 500 was anticipated to gain a meager 3%.
But no matter what the outcome is, the stock market is expected to gain traction post-midterm. The S&P 500 has increased on average 15.3% in the six months following midterm election in the third year of a given presidency, which is incidentally this year. 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, per S&P Capital IQ.
And how can we forget that the stock market, 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).
U.S. Economy in the Pink
But, why just rely on historic patterns? The U.S. economy is doing well and that should eventually help the stock market maintain momentum. 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.
At the same time, consumers in America are currently most confident in almost two decades, courtesy of a healthy labor market. Their assessment of present-day conditions is positive, making them confident of continued economic expansion, at least in the near term (read more: Consumer Confidence Leaps to 18-Year High: 5 Big Gainers).
5 Top Picks
With the stock market gaining strength typically after the midterm election and a late-year spurt may as well be on the cards banking on solid economic growth, investing in fundamentally sound stocks seems prudent at the moment.
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.
Arch Coal, Inc. (ARCH - Free Report) produces and sells thermal and metallurgical coal from surface and underground mines. The Zacks Consensus Estimate for the company’s earnings rose 39.4% in the last 60 days. The company’s expected earnings growth rate for the current year is 32.5% compared with the Mining - Miscellaneous industry’s projected rise of 4.3%. The stock had gained 1.5% on Nov 7.
KEMET Corporation (KEM - Free Report) manufactures and sells passive electronic components. The Zacks Consensus Estimate for the company’s earnings rose 34.1% in the last 60 days. The company’s expected earnings growth rate for the current year is 90.9% compared with the Electronics - Miscellaneous Components industry’s expected rise of 15%. The company saw its shares jump 4.8% yesterday.
Materion Corporation (MTRN - Free Report) manufactures and sells advanced engineered materials. The Zacks Consensus Estimate for the company’s earnings rose 6.5% in the last 60 days. The company’s expected earnings growth rate for the current year is 32.6% compared with the Mining - Miscellaneous industry’s projected rise of 4.3%. The stock went up 2.3% on Nov 7. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 estimated rise of 11.4%. The company saw its shares climb 5% yesterday.
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 Electronics - Miscellaneous Components industry’s projected rise of 12.1%. The stock soared 4% on Nov 7.
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