What the Mid-term Elections Mean for the Markets

investment landscapeThe investment landscape has changed again.

Markets are booming following the mid-term elections and Federal Reserve meeting. After stalling for over a week, the S&P 500 blew above a key level at 1,200 on Thursday, while the DOW surged above 11,300. Much of the bullish sentiment had already been in the market, but traders were clearly happy to hear that the Fed had announced a new higher-risk plan to buy back $600 billion of its government bonds within eight months in an attempt to drive down financing rates for consumers and businesses and help give the somewhat modest economic renewal a fresh catalyst. Estimates had pegged the buyback at $500 million.

Yes, the buyback is encouraging and it will make capital easier to carry, but it will also drive up inflationary pressures. At this point, I believe that the Fed and government want to focus on making sure the economy continues to steadily pick up, as this will also generate much-needed job growth and help to drive consumer spending, which accounts for about 70% of Gross Domestic Product in the U.S. Yet, at the same time, there are questions surrounding the effectiveness of the strategy given the fragile state of jobs and housing.

President Obama will also face more obstacles in trying to push forth his policies following the overwhelming victory by the Republicans, who won back control of the House of Reps, while also gaining some seats in the Senate. There was nothing unexpected with the mid-term results, but it does indicate that Americans are generally not pleased with the President’s course of action and results two years into his first term. What is worrisome is that the change in control of the House will surely have an impact on some of President Obama’s policies, including the major healthcare reform and how he has dealt with Wall Street.

Leaving the politics aside, markets seem more optimistic, especially with the extra incentives from the Fed. And if you look at the historical patterns, you got to be invested in this market or you could find yourself missing out on some gains. According to the Stock Trader’s Almanac, the midterms are important for the markets, and this appears to be the case indeed. The DOW has increased an average of 3.1% after the midterm to the end of the year and, more interestingly, it’s up 25.7% on average from the midterm to the high of the following year.

This pattern has occurred since 1934. The DOW is already up 1.44% since the mid-term elections on Tuesday, so it seems the 3.1% average advance may not be difficult to achieve.

The key is to ride the buying wave, but at the same time take some profits off the table, as there have been some strong gains across the board.