Even though we’ve seen a 16% hit on average in midterm election years, 12 months later the market is up from the trough.- John Lynch – LPL Chief Investment Strategist
Market volatility continues with October being one of the worst months in recent years for the S&P 500. In this week’s podcast, LPL Research strategists John Lynch and Ryan Detrick discuss the normality of the recent market events, the ongoing European economic issues, and what still is a positive outlook for the US economy.
As the strategists point out, the average year sees the S&P 500 pull back between 5-10% three times and at least 10% once a year. Although this might feel uncomfortable, it’s important for investors to remember this year is following normal patterns. Stocks have never been lower a year after a midterm election going back to World War II, but seasonality is on the bull’s side. The overall fundamental backdrop remains strong, as earnings and GDP both support a strong US economy.
Economic matters in Europe remain a concern, however, as weakening fundamentals and issues with leadership pose questions for the future. The strategists also note concerns over the continued China/US trade worries, a potential Fed policy mistake, and a weakening technical backdrop for equities.
October has been rough for equities, but there is a potential positive silver lining. During a midterm year, the S&P 500 Index has gained from the October lows until the end of the year every single time since World War II. That is 18 for 18, with an average gain of 10.6% versus an average year gain of 7.4%.
After the recent equity weakness amid continued strong earnings growth, valuations are quite attractive. In fact, the S&P 500’s forward Price-to-Earnings (P/E) ratio is 15.5, its lowest value since early 2016.
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