The US political catalyst for stocks is over; the market rally probably isn’t

DO YOU believe in miracles? You should. Stocks worldwide, including those in Singapore’s benchmark Straits Times Index (STI), have just reaped the huge spoils of one – and they aren’t done climbing.

In September, I told you global stocks were approaching a bullish seasonal sweet spot – the nine months framing America’s midterm legislative elections. This has consistently been the most profitable stretch in stock market history. I call it the midterm miracle.

Indeed, the stock market didn’t disappoint. Sector skew and overblown China-fretting limited STI gains, but even it bounced off October’s low.

What next? History indicates more gains ahead. Global politics will help, not hinder, stocks through 2023 and into 2024. Stay bullish.

The nine months ended Jun 30 formed a near-picture-perfect midterm miracle. In US dollar terms, American stocks rose 7.6 per cent, 7.5 per cent and 8.7 per cent, respectively, in each of the three quarters.

The gains paralleled averages of 6.3 per cent, 6.6 per cent and 5.5 per cent since the start of good data in 1925. The 25.7 per cent increase over the entire nine-month period also topped the historical average.

High correlations between US and world stocks – including Singapore’s – meant the midterm miracle was positive for other markets too. World stocks returned, in Singapore dollar terms, 2.6 per cent, 6.8 per cent and 8.7 per cent, respectively, over those three quarters. The nine-month return was 19.1 per cent.

The STI rose each quarter, too, though gains slowed to a trickle in Q1 and Q2. One key reason: its lack of tech stocks, which soared over 40 per cent globally in 2023’s first half and are leading the rally.

Financials and real estate – the two major sectoral components of the STI – notched first-half returns of just 4.3 per cent and 1.9 per cent, respectively, worldwide. Still, the STI has gained 14.1 per cent since October’s low.

Stocks have historically risen in the back half of US presidents’ third years, albeit less strongly. US stocks were positive in 75 per cent of all third years’ back halves. This is not as much as the 92 per cent for first halves, but is still better than average.

The average second-half returns were 5.5 per cent in US dollar terms. This was less than the first half’s 12 per cent, but nothing to look at with disdain either.

When negative, back halves of third years are typically mild. Of the six back-half declines, only 1931 and 1987 were more than a wiggle.

The former struck amid the Great Depression. The latter was among history’s most fleeting bear markets. Excluding those two years, the worst return in the second half of a US president’s third year was 2011’s 3.7 per cent slide.

More good news: fourth years, which are election years such as 2024, are usually strong. US stocks have climbed in 83 per cent of them, with 11.4 per cent average returns.

That bullish breeze has blown across the Pacific to Singapore, too. Since good data became available in 1969, Singapore stocks have gained in 62 per cent of US presidents’ fourth years in Singapore dollar terms – in line with the 60 per cent for all years.

Average returns were 19.2 per cent; not quite the whopping 26.3 per cent for third years, but far above the overall average.

It isn’t magic that underpins this US presidential phenomenon, but gridlock. While Singapore has long operated under single-party control, US elections frequently shift power – driving reliable fits and starts in legislative activity.

Presidents’ parties typically lose relative or absolute Congressional power in midterms, dimming their legislative clout. Hence, they must attempt their most sweeping legislation before midterms.

Cases in point: Joe Biden’s infrastructure and tax reform plans; Donald Trump’s income-tax cuts; and Barack Obama’s healthcare and financial reform. After the midterms, loud political squawking remains; but big bills die.

Stocks love this. New laws always create winners and losers. Behavioural finance shows that losers feel the pain much more than winners see equivalent gains. Gridlock replaces swirling uncertainty with sweet, underappreciated stability.

Meanwhile, biases blind most to gridlock’s power, creating repeated positive surprise.

Most US presidents don’t want to pass anything major as the election year nears. Doing so risks irking large swaths of voters. They would rather use unaddressed issues as fundraising bait and campaign promises: get me re-elected, and I’ll fix it!

Politics aren’t everything. But with a new global bull market alive, they should be a nice, overlooked positive for world stocks throughout 2023’s remainder and into 2024. Position for the tailwind.

The writer is the founder, executive chairman and co-chief investment officer of Fisher Investments, an independent investment adviser serving both individual and institutional investors globally