The Day After: What to Expect After Today’s Market Panic

Before I dig into today’s essay, let’s talk about the elephant in the room.

The stock market is in panic mode. Friday’s selloff was painful. Today’s rout is harder still.

What was the trigger?

Ah! That’s the billion – nay trillion – dollar question, isn’t it?

From the looks of things, investors didn’t like the jobs report on Friday morning. They believe the Federal Reserve has held interest rates too high for too long and the economy is now in serious trouble. 

Add to that a slew of disappointing earnings in the tech sector… the fact that Warren Buffett himself just unloaded about half of his massive Apple (AAPL) position… and that we started this little spate of volatility with most of the tech sector in bubble territory, and it was just a matter of time before something broke. 

Are we close to a bottom?

Maybe.

Maybe not. 

It’s too early to say. What happens next may depend on when and how aggressively the Fed cuts rates. 

We’ll know soon enough. But as we’ve been writing for the past year, we’re living in an Age of Chaos. Volatility explosions like these should be expected. 

So, let’s look beyond this current market correction… panic… whatever this turns out to be… and consider what to expect from the market after November 5. 

At this stage in the game, most betting markets are still giving Donald Trump a slight lead, but that lead is narrowing. And most polls, even within the swing states, are within the margin of error, meaning that Trump and Kamala Harris are statistically tied. Of course, this situation is so fluid that at any point these numbers could shift… and then shift again.

As is fitting for this Age of Chaos, our only real certainty is uncertainty… 

Still, it serves us to look at history to see how the stock market might react to different election outcomes. 

Six Possible Arrangements

I took the data back to 1929 and identified six potential arrangements:

1. Republican president with Republican control of both houses of Congress.
2. Republican president with Republican control of one house of Congress (Democrats controlling the other).
3. Republican president with Democratic control of both houses of Congress.
4. Democrat president with Democratic control of both houses of Congress
5. Democrat president with Democratic control of one house of Congress (Republicans controlling the other).
6. Democrat president with Republicans controlling both houses of Congress.

Before we continue, I have to throw out a major caveat. 

Remember that for all the attention the president of the United States gets, they don’t control the stock market. You and I… along with millions of other investors and untold algorithms… control the stock market. When there are more of us wanting to buy than sell, prices rise. When there are more of us wanting to sell than buy, prices fall. 

It’s really that simple… 

It’s why following the money is the primary strategy I use in Freeport Alpha… and why I don’t let politics dictate my investment decisions. If I invested based on my optimism for a president’s policies, I would have been sitting on cash for the past 47 years of my life. 

But government policies – and particularly tax policies – do have an impact on profits and investor sentiment. So, it’s good to know how the market has behaved under various circumstances. 

Here’s what the data tells us…

One point that should really jump off the page is the small sample sizes we’re dealing with. For example, there have only been two election cycles in which we had a Democrat president with a mixed Congress. Even then, in both cases we had a Democrat-controlled Senate with a Republican-controlled House of Representatives. Both cycles were during the Obama presidency. 

Interestingly, over the period reviewed, we never had a situation in which a Democrat was president, Democrats controlled the House, and Republicans controlled the Senate.   

However, hypothetically, any of these six outcomes could happen. But the electoral math strongly suggests that Republicans will take the Senate. The betting markets are pricing in a better than 70% chance of this, and the only way the Democrats can keep the Senate would be with a major upset in Montana, Texas, and/or Florida. 

So, we can assume for now that a Democrat sweep is off the table. My best guess – and you should take this with a major grain of salt – is that whichever party takes the White House also takes the House. 

That leaves us with the two most likely outcomes as a Republican sweep or a Democrat president with a mixed Congress. 

Those two scenarios have given us returns of 6.5% and 14.3%, respectively. That’s something to look forward to – I guess. Particularly following the market’s current mood.

One thing I would note is that every election scenario I tracked had positive returns on average. This is further proof to my point that the economy and the stock market have a way of getting on with business no matter what particular arrangement of mouth-breathing imbeciles happen to be running the country at any given time. 

Of course, I’d also reiterate my point that neither Trump nor Harris… nor any sitting member of Congress… has given any indication that they take our national debt crisis seriously. So, no matter how the cards end up falling in November, the result will be more debt, continued deficits, further degradation of the dollar… and a country on the express train to financial ruin. 

Whoever you vote for… and whatever happens in the markets in the meantime… be sure you hold on to your dollar hedges!

To life, liberty, and the pursuit of wealth.