Today is the day, as the US midterm elections are being held across the country. My question is whether equity investors will re-enter the market at these levels and kick off a post-election rally.
As I have been discussing over the past few weeks, investors seem to have been taking a wait-and-see approach to the market as they awaited answers to three key questions:
Tech earnings/AI growth: Is the AI growth cycle speeding up or slowing down?
Inflation: When and how will the Fed act to tame inflation?
The midterm elections: As I have discussed numerous times, the fourth quarter of a midterm year and the year that follows have historically been a very good time to own equities. Will we see the pattern emerge this year?
How I feel after all the Halloween candy I ate this year
So far, the market has been disappointed with what it has heard from tech companies on AI growth and how the Fed is handling inflation.
Investors have been moving away from high-beta and growth, and into low-volatility and value areas of the market:
…and only large-cap, mid-cap, and the dollar are trading above cloud support:
iShares S&P 500 Value Index (IVE):
iShares S&P MidCap 400 Value Index (IJJ):
US Dollar (DXY):
One note on dollar strength: in the bottom pane of the chart above, I included a momentum oscillator, which has turned negative.
The dollar (DXY) has been in a pattern of rising steps higher, and if the pattern continues, we should start seeing the dollar get weaker.
In the past, as the dollar has gotten weaker, high-beta stocks have improved.
In the chart below, I have added the S&P 500 High Beta ETF (SPHB) to the bottom pane. Highlighted in yellow are the periods after the dollar peaked in its step pattern and momentum began to weaken:
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