By Eric Hough
Wednesday’s morning alarm sounds and everything is up. Democrats cruised to a House and Senate victory. Republicans lost seats in places they had grown accustomed to coloring red….TEXAS really?!? Before breakfast, investors had a new political map and the same old question.
“Should I do something?”
Democrats’ sweep ushers in divided government, with President Trump facing an opposition Congress for the remainder of his term. Ohio voters also returned Sherrod Brown to the Senate and elected Amy Acton governor, putting a state at the center of the power and datacenter debate firmly in the morning after spotlight. Ohio may end up being at the forefront on how states deal with power and data center buildout, which could add caution to the overall A.I. (I think we are back to calling it AI now.) heavy S&P 500.
For investors, this is prime FOGO territory, the fear of getting obliterated. FOMO gets you to buy after a rally. FOGO gets you to sell after watching seven hours of election coverage featuring way too much makeup, increasingly urgent graphics, doomsday prepper commercials with a sprinkle of prescription drug ads.
The overnight market managed to experience both the Fear and the ever resolute buy the dip crowd. The S&P 500 futures initially fell as much as 1.4%, then recovered to trade higher early Wednesday. Those were overnight prices, rather than a verdict from a full trading session, but the reversal captured the challenge of making investment decisions while the results are still scrolling across the screen. A truth as old as man, anxiety is in the anticipation after the event a sense of calm.
I believe for the next six months remains positive for U.S. stocks. The election gives investors a clearer picture of who can advance legislation, block nominations, and investigate the administration. Companies can begin adjusting to that picture. Earnings, interest rates, and the price investors pay for growth will do much of the work from here.
The last time the map looked like this, and the closest political comparison, was 2006 when Democrats flipped both chambers during George W. Bush’s second term. Like Trump, ‘W’ was extremely popular in his first term only to stumble in round 2. After the November 2006 election, the S&P 500 gained approximately 8.9% in price terms over the next 126 trading days, roughly six months. Across a broader sample beginning in 1970, the index averaged a 14.1% total return in the six months after midterms, compared with 5.7% over comparable periods in other years. The 2006 comparison also deserves an expanded calendar. Stocks performed well over that six-month window. The caveat, close your eyes, by the end of 2007, the US was walking, or should say sprinting, toward the Great Financial Crisis.
Advisors and investors could have been right about this post-election rally and still need a sound risk plan. Six-month optimism and long-term discipline can coexist. History is helpful company, although it has an unfortunate habit of withholding the itinerary of what’s to come.
Today’s starting point is also different. Valuations, leverage on corporate balance sheets, financing costs, and investor positioning will determine what this election means for returns. A Democratic Congress can make major new Republican legislation harder to pass. The president retains veto power and substantial executive authority. Divided government creates a need for negotiation, along with plenty of opportunities for both sides to explain and pin faults on others.
For a client who wants equity exposure but finds every drawdown emotionally expensive, a lower net exposure long/short equity fund may help. A fund manager buys companies expected to outperform and shorts companies expected to lag. Successful stock selection can add returns while lower market exposure can reduce participation in a broad selloff. The trade-off can be lagging performance in a strong rally, along with fees, security borrow costs, and the possibility of getting the security selection wrong. The exposure matters more than the label. A portfolio that is 130% long and 30% short still has 100% net exposure by dollars. Its actual market sensitivity depends on the securities held, too. The word “hedged” should prompt a few questions before it prompts a sigh of relief.
A long-volatility or tail-risk fund serves another purpose. It may generate gains during a sudden, severe decline, providing something to sell when the rest of the portfolio is under pressure. Carrying that protection can cost money in quiet markets, and a strategy built for a crash may provide limited help during a slow decline. Position size matters. In a hypothetical $1 million portfolio, suppose a $20,000 tail allocation triples while the remaining $980,000 falls 20%. The hedge earns a profit of $40,000 and the overall portfolio declines 15.6% instead of 20% without the hedge. That is meaningful protection. It also leaves the client with a loss large enough to make the advisor’s phone ring. A plan for using the hedge’s gains in event is just as important as the hedge itself. Proceeds could fund withdrawals or buy stocks at lower prices. Without that plan, a client can watch the hedge rise during a panic and surrender those gains during the recovery.
Overall, I remain constructive for the near term. The historical post-midterm record supports staying engaged, while the election results create specific questions about regulation, financing, and infrastructure development. A measured hedge can make that outlook easier to hold through uncomfortable days. The aim is a portfolio the client can stick with when FOMO and FOGO arrive in the same news cycle. If stocks are higher by spring, the protection costs a little money, and the biggest surprise is still the electric bill, that would be a perfectly respectable outcome.
Eric Hough | Private Markets
Eric Hough is an independent consultant, specializing in Alternative Investments. In this role, he will assist Asset Management and Advisors with due diligence associated with private market funds. With extensive Wall Street experience and deep expertise in alternative assets, Eric is well-positioned to deliver meaningful value to clients while advancing the firm’s long-term growth initiatives.
Disclosure: I/we have no stock, option, or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Investment advice offered through Great Valley Advisor Group (GVA), a Registered Investment Advisor. I am solely an investment advisor representative of Great Valley Advisor Group, and not affiliated with LPL Financial. Any opinions or views expressed by me are not those of LPL Financial. This is not intended to be used as tax or legal advice. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Please consult a tax or legal professional for specific information and advice. LPL Compliance Tracking #1204122
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All investing involves risk including loss of principal. No strategy assures success or protects against loss.