The midterms

S&P moved to a record high overnight, as the US midterms delivered their expected outcome.

US Greenback
Source: Bloomberg

Having now completely retraced its steps after the September-October pullback, the US continues to be the place to invest. Corporate earnings remain robust having seen the best earnings rates versus estimates in four years, while macro data continues to deliver.

The market, however, had its eye on the midterms, which provided an interesting break in the market cycle, as there is a severe lack of data for the rest of November.

There are plenty of historical pointers to consider from the midterms. For example, history shows that when the Republicans have control of the House and the Senate - with a Democrat President - the S&P has rallied 16% over the next six months.

What’s even more interesting during the mid-terms are the surveys conducted on the night, examining how Americans see the current state of affairs. According to the surveys, 78% of those voting are concerned about the US economy. Almost half (48%) believe that Obamacare has gone too far and nearly two-thirds of those that voted believe the country is on the wrong track.

This is an interesting insight into how the citizens of the US see the future.  Despite the US$4.5 trillion stimulus over the past six years, US market record highs, expanding manufacturing and rising employment, there is still an underlying pessimism in everyday American life.

It is something that is likely to keep rates low and equity prices high, as investors continue to be reversed on spending and on job security - two main issues when people feel the economy is heading in the wrong direction.  

On a short term view, the midterms should now be completely factored in. Expectations were for the Republicans to take control and they have, with the strength of the victory a little higher than estimated. I continue to see the US markets having a small breather before the usual strength seen in early to mid-December, as there’s little on the agenda in the US over the coming three weeks. No news tends to see softer trading.

Ahead of the Australian open

The Australian employment data will be a roll of the dice. The new survey changes are only going to bring more uncertainty and constant revisions to the unemployment rate makes the data unreliable. The AUD is below 86 cents for the first time since July 2010. The print will see a high level of volatility at the drop, before stabilising with a USD bias.

We’re currently calling the ASX 200 up 0.34% to 5537 on the leads out of the US. However, iron ore fell to US$76 a tonne and gold is also underperforming. The rise expected may be muted due to the fall in materials.

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