Is It Really The Economy Stupid?

By: Kent Engelke | Capitol Securities

The third quarter ends on Friday. Perhaps the most significant event during the fourth quarter is the election. As I have already opined, I think this will be the most significant midterm in at least two generations.

There are two absolutes about midterms or elections. The first is the party of the incumbent president always loses seats in Congress. Over the last 21 midterm elections, the party of the sitting president has lost an average of 30 seats in the House and 4 seats in the Senate. There were only two elections the incumbent party gained seats in both houses; 1934 and 2002.

The second absolute is people vote their pocketbooks. If the economy is strong, social issues are less paramount.

The election is in about six weeks. The polls are suggesting a “Blue Wave” partially predicated upon the traditional outcome of midterms and partially from the perceived vitriol towards the president from both parties.

What are the odds Congress does not change power? What are the odds the Republicans gain seats?

Wow!

It is my understanding the response rates for polls is about 5%. The obvious conclusion is that few are willing to be polled and those that are polled may be very hesitant to express their support for the president fearing that they would be labeled homophobic, misogynistic, xenophobic, etc.

Perhaps the correct question to ask is will the economy overcome social issues as all remember it is the economy stupid!

As widely documented, the economy is growing at the greatest pace in over 10 years and some sentiment levels are at record levels. According to Gallup, today is only the second time in 10 years Republicans are viewed as more favorable than Democrats. The last time was 2011 when the Republicans captured control of the House via the greatest loss of seats by any party in history.

I am certain the rancor will rise as November 6 approaches.

Commenting upon yesterday’s activity, stocks slipped on growing concern about the outlook for global trade and US politics. Oil rallied to a four-year high. Treasuries closed nominally higher in yield.

What will happen today?

Last night the foreign markets were up. London was up 0.48%, Paris was up 0.20% and Frankfurt was up 0.21%. China was down 0.58%, Japan was up 0.29% and Hang Sang was closed for a holiday.

The Dow should open nominally higher. The 10-year is off 4/32 to yield 3.106%. Will yields breach 3.112%, the level reached last May and the highest yield in over seven years? If so, how will equities respond? Oil is also at a four-year high.

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