11/9/18 – Markets Respond Positively to Divided Government

Stocks finished their best week since June following the midterm elections this week which saw the Democrats regain control of the House while Republicans retained control of the Senate. This result was largely expected by pre-election polling and election betting markets. Stocks responded very positively to the news. This change likely means any future tax cuts will not happen, although that seemed very unlikely either way. The areas where some bipartisanship could happen is infrastructure and drug pricing, although given a Republican Senate, I wouldn’t expect anything significant on either front in the next two years. We could be looking at two years of gridlock. Markets are generally supportive of gridlock as businesses can invest knowing it’s unlikely any major policy changes will be coming in the near future. For the week, the Dow gained 2.8% while the S&P 500 increased 2.1%.

McDonald’s (in)famous McRib sandwich is back in stores for a limited time. What does that have to do with investing and the stock market? One analyst went back to 2010 and found the S&P 500 performs significantly better, on average, on days when the McRib is available. Over that time period, the McRib has been available on almost 20% of trading days and the average daily gain on those days was 0.11%, almost four times the 0.003% average daily gain on days when the McRib was not available. Of course correlation doesn’t equal causation, but its amusing to see these anomalies. Let’s hope the correlation continues this year. See the chart here.

Oil decreased again this week, declining 4.0% to close at $60.28/barrel. The yield on the 10-yr Treasury moved lower, closing at 3.19% from 3.22% last week. The average rate on a 30-yr fixed rate mortgage moved sharply higher to 4.94%, from 4.83% last week, the highest level in seven years.

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