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Ivan Gruhl, Chief Investment Officer, HK Financial Services

Overview:   Last Tuesday’s U.S. midterm election results were the focus of the week, with the Democrats taking control of the House of Representatives and the Republicans retaining control of the Senate. The initial market reaction was positive;  the rationale is that gridlock in Washington should help reduce political uncertainty. The S&P 500 rose about 2% for the week, and is now up 2.5% for the month, followed by developed international stocks (EAFE) up 1.5% for November.  The Federal Reserve concluded its November meeting leaving rates unchanged at 2.25%.  Markets now assign a 75% probability of a 25bp rate hike next month.  2-year and 10-year Treasuries finished the week at 2.93% and 3.19% respectively, with the shape of the curve remaining stable at a 28bp spread between 2-year and 10-year.  Oil prices traded down 4% for the week as excess inventories boosted supply while fears of a global growth slowdown continued to test demand.

Markets do not like uncertainty, such as events leading up to midterm elections.  Though we do not claim statistical significance between election results and stock returns, we show in the chart below what has happened to S&P 500 index performance in midterm election years, as measured from October lows to the end of the calendar year.

Weekly Returns and Data