Stocks usually do well after the midterms. Not this time, forecasts BlackRock

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United States Capitol

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Referenced Symbols

 

• META
  -24.56%
  GOOG
  -2.34%
  MSFT
  -1.98%
  AMZN
  -4.06%
  ES00
  -0.60%
  NQ00
  -1.06%

 

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Length 7 minutes

 

So much for the safety of the tech behemoths, those supposedly friendly giants who may be relatively richly valued but you could still count on to buttress your portfolio.

Poorly received results from the likes of Meta META, -24.56%, Alphabet GOOG, -2.34%,Microsoft MSFT, -1.98% and Amazon AMZN, -4.06% et al saw nearly $1 trillion at one point chopped of the big tech valuations this week, according to the FT. 

Forlorn equity investors have seen TINA turn to TIN. From There Is No Alternative to stocks, we now seemingly have There Is Nobody you can rely on.

 

But at least with the U.S. midterm elections fast approaching on Nov. 8, surely we have the politicians to help us. Well, not this time says the team of analysts at BlackRock led by Wei Li, global chief investment strategist.

Stocks tend to do well after the U.S. midterms, they note, because gridlock is a common result, and this prevents policy changes that could rattle the market. 

However: “We see a bigger problem for stocks than any potential positives from the midterm election outcome: a looming recession. We have argued how central banks rushing to hike policy rates to get inflation back to target would need to crush interest rate-sensitive parts of the economy first,” says BlackRock’s team.

They point to clear signs of damage already inflicted on housing, for example.

“As mortgage rates soar along with the Fed’s aggressive rate hikes, the number of
new housing starts is falling quickly. The slide in housing starts this year (see
orange line in the chart below) is already steeper than past mega Fed rate-hike
cycles such as in the 1970s and early 1980s – as well as the unwind of the mid2000s U.S. housing boom (other colored lines),” they write in a note published this week.

SOURCE: BLACKROCAny fiscal stimulus that may follow the midterms could be counterproductive for markets, BlackRock reckons, because it would operate at cross purposes to the Federal Reserve’s battle against inflation. It would come as debt levels are high and interest rates are rising, a combination that may revive the bond market vigilantes, just like it did recently in the U.K.

BlackRock says that following the midterms the political focus will shift to the economy, and in particular lawmakers will start to express that they see greater danger in the Fed’s tightening than they do in the impact of inflation. 

 

“We see the politics of rates creeping into the politicization of everything with more voices beginning to decry the aggressive rise in interest rates that is causing recession. We see the Fed stopping its hikes amid the economic damage and pressure to ease up on tightening, but price pressures will persist. That’s why we think it will eventually have to live with some inflation,” says BlackRock.

Still, the Fed will only pause “only after the economic damage of rate rises is clear. All this outweighs any expected boost for stocks after the midterms, in our view…We’re underweight developed market equities,” BlackRock concludes.

Markets

 

S&P 500 futures ES00, -0.62% were down 0.6% to 3798 and Nasdaq 100 futures NQ00, -1.09% fell 1% to 11125 as disappointing corporate earnings weighed on sentiment. The 10-year Treasury yield TMUBMUSD10Y, 4.003% rose 9 basis points to 4.013%. Concerns about more COVID-19 shutdowns in China pushed U.S. crude oil futures CL.1, -0.90% down 0.8% to $88.39 a barrel.

 

https://www.marketwatch.com/story/stocks-usually-do-well-after-the-midterms-not-this-time-forecasts-blackrock-11666952825