On Wednesday, November 5, America woke to find out that Republicans regained control of the U.S. Senate for the first time since 2006. Indeed, one can’t help but hum “The Morning After” without remembering that both houses of Congress were controlled by one party for 100 of the past 114 years. Even better, investors may have forgotten that the combination of a Democratic President and a unified Republican Congress has been accompanied by the best average performance for the S&P 500 since 1945, as the S&P 500 rose an average 15.1% in the eight times since 1945 in which a Democratic President has been opposed by a Republican-controlled Congress.
If the market should indeed do well as a result of the upcoming political scenario, which sectors have the best chance of outperformance? As we enter the November through April period, or what some call “The Cyclical Six,” investors may want to consider those sectors that recorded the best six-month price returns and batting averages, or frequencies of outperformance (FO). Specifically, the S&P 500 Consumer Discretionary, Industrials and Materials sectors recorded the highest average returns and FOs since 1990, gaining more than 9.5% each, while the S&P 500 rose 7.2%. Info Tech also did well, advancing 9.0%, but beat the market only 57% of the time. Some might ask: Why bother paying attention to the calendar at all when “Sell in May” failed this year? Because the “Sell in May” sector rotation strategy did NOT fail this year. Investors who embraced a 50% exposure to the Consumer Staples and Health Care sectors from May through October saw a 10.8% gain vs the S&P 500’s rise of 7.1%.
So there you have it. History says, but does not guarantee, that the political scenario of a Democratic President and a Republican-controlled Congress holds great promise for domestic equities. With that in mind, S&P Capital IQ advises three things: 1) Stay Long – The S&P 500 has historically gained 8% AFTER getting back to breakeven from a decline of 5%-10%, 2) Emphasize Cyclical Sectors – In the Nov-April period since 1990, a 25% exposure to the Consumer Discretionary, Industrials, Materials and Tech sectors gained an average 9.9% vs 7.2% for the S&P 500, and this combination beat the market 75% of the time, and 3) Focus on High-Quality Stocks – Those issues that have had an above-average consistency of raising their EPS and dividends in each of the past 10 years are trading at a double-digit discount to the S&P 500. They usually trade at a premium. Only time will tell if this historical record skips or continues to plays on.
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