The Blue Wave Leads to Green… Then Lots of Red

Well, the Midterms are over and for those anxiously anticipating the end of political ads were greeted with a huge rally in the stock market on Wednesday.  As investors breathed a sigh of relief, we awoke to a very intense turnaround and negative day on Thursday.

So, what happened, what’s behind it all, and where do we go from here?

What Happened

The Democratic Party secured 54 seats in the Senate and approximately 252 seats in the House of Representatives, ending Republican majorities in both chambers.  The results amounted to a sweeping political shift, with the election being interpreted as a broad pushback against tariffs, the Iran conflict, and elevated energy prices.  At least 7 Republican-held seats flipped to Democrats in the Senate.  The House of Representatives now holds the largest Democratic majority in two decades with Hakeem Jeffries in line for Speaker.  Even at the state level, 5 Governors flipped from Republican to Democrat.

With a divided government for Trump’s final two years, the opportunity to pass spending and tax policy is inherently more difficult.

How The Market Reacted

On Wednesday we had a relief rally, with the DOW posting its best post-midterm day since 1982, up just over 3% on the day.  

The S&P 500 and the NASDAQ also participated higher, although not quite at the same pace.  This was a relatively broad market rally with 9 of 11 S&P 500 sectors up on the day, with only Energy and Industrials lagging.

Oil prices dropped, which may have been some wind at the back of markets.  Why?  Simply put a divided government and a Democratic-led congress makes investors think that pressure to end the Iran conflict and reopen the Strait of Hormuz is a top political point for the newly elected Congress.

Treasury Yields, which have been ever-increasing also declined across the yield curve.

As Lee Corso used to say on College Football Gameday… NOT SO FAST MY FRIEND

We woke up on Thursday with some red on the screen, only to intensify as the day has gone on (I’m currently writing this Thursday afternoon).

Why the selloff and the reversal? During the midterm elections, there were various data-center-related ballot measures, restricting the build out of AI data centers.  Of the 45 local ballot measures that were voted on, most of them passed.  This could pause or slow down the data center buildout and delay the capacity increases we had estimated before Tuesday’s election.

With that we are seeing the broader markets, especially those associated more closely with AI and the data center buildout selling off hard.  The NASDAQ is currently down over 4% on the day, the S&P 500 is down over 3%, even a name like Caterpillar (only AI related because of the data center build out and the use of their equipment) is selling off today.

Where Do We Go from Here?

These are simply my views and the actual predictions of where we go from here will only be proven as we move ahead.

Like trying to eat a 72-ounce steak, we all need time to digest what happened on Tuesday, and that can take time.

First, in my view the stock market does not like Republicans over Democrats, anyone who says otherwise is wrong.  Markets go up when both parties have control, and both parties have had control during times of strife.  What the stock market does like is clarity.  We woke up Wednesday with clarity, and the market responded in kind.

Now, why is the market selling off today?  That could just be the digestion and positioning within the broader market.  Some people are making positional bets related to the AI build out, data centers and other areas more broadly.  The fact is that at this moment, everything is down, all 11 sectors.  Some are down less than others (Utilities, Consumer Staples) but all in the red.  If this was a true rotation, we would not only see one color on the screen.

Technology is the worst performer, along with the tech-heavy NASDAQ.  Those are closer to the AI trade than anything else.

With the prevailing narrative being that data centers will be harder to build and expand as previously thought, anything related to AI is being repriced for slower than expected growth.

Ultimately stocks trade on a multiple of growth and expected future growth.  When that growth slows, those stocks are sold, trimmed, and exited.  That’s what we are seeing today.

The truth of the matter is, just because the parties switched majority does not mean that AI, or Super Intelligence, is going anywhere.  Companies and consumers have found real use cases towards it and there are trillions of dollars allocated to making this work.  Two years of gridlock may slow (keyword is MAY) down the buildout, or not, but it is just two years.  Some of these memory and chip companies were taking orders for after 2030.

The stock market and our economy are ever-changing, and in my view, two years of divided government alone is unlikely to push it over the edge.  It could be choppy in the near term, but the near term is not forever.

Final Words of Wisdom

Ever since 1950 the stock market has been positive from every Midterm election year through the following June.  That is 19 midterm election years, 19 positive markets.  Not every one of them went up in a straight line, and maybe this time is different.

However, I do not believe that the midterm election was the death blow the markets are interpreting to our economy.  This too shall pass, it might be choppy in the near term and if appropriate for your situation, this may be a good time to talk with us and your tax professional about harvesting losses in taxable accounts.

When you try and time the market or give in to the fear of red on the screen from day to day, that can cause real issues of building long term wealth.

So simply put… just breathe.