What the US mid-terms meant for the markets

This week the US had its mid-term elections and with the Dow Jones down more than 10% for the year, many are looking for positive news to drive the market higher. Given this, it's timely to review how the mid-term elections affect the US stock market.

Looking back over 40 years from 1982 when Ronald Regan was the US President to 2018 when Donald Trump was the president, there have been 10 mid-term elections. On nine occasions, the Dow Jones rose the following year while in 2015, when Barack Obama was the president, the Dow Jones fell just 2%.

The highest gain on the Dow Jones following the mid-term elections was 33%, while the lowest was 2% with an average rise around 18%. Interestingly, in the year the mid-term elections are held, there are three occasions, including 1990, 2002 and 2018, where the Dow Jones fell in price like it has done this year. Yet the following year, it rose 20% or more. So, what does this indicate that may unfold with the Dow Jones in 2023?

Probability suggests there is a 90% chance the Dow Jones will rise in 2023 and while we only analysed the mid-term elections over 40 years, the data also indicates that the rise in 2023 is likely to be strong and in the order of 20% or more. Given that the Dow Jones has only fallen seven times since 1982, three of which were the consecutive years from 2000 to 2002, it means there is a 71% chance of the Dow Jones rising in 2023 given 2022 is a negative year.

While probability does favour the Dow Jones rising next year, which means the Australian market should also be bullish, it is not a done deal, and you need to remember, as individuals we buy stocks and not the market. Therefore, you need to ensure you choose wisely when deciding which stocks to buy.

The best and worst performing sectors this week

The best performing sectors include Utilities up more than 15% following the takeover bid for Origin Energy, which saw it rise more than 36%. This is followed by Materials up more than 4% and Consumer Staples, which is up more than 2%. The worst performing sectors include Information Technology down more than 4% followed by Energy down more than 3% and Financials down more than 1%.

The best performers in the S&P/ASX top 100 stocks include Origin up more than 26% followed by Evolution Mining up more than 20% and Northern Star Resources up more than 13%. The worst performing stocks include Whitehaven Coal down more than 16% followed by James Hardy down more than 14% and Xero down more than 13%.

What's next for the Australian stock market

So far this week, the All Ordinaries Index has mirrored exactly how it unfolded last week with the market rising Monday to Wednesday before falling away on Thursday. There are two points to take notice of here, the first is that as of the close on Thursday night, the All Ordinaries Index has not traded higher than the previous week. Secondly, if it does not trade higher on Friday, this will be the third consecutive week the market has risen only to fall away later in the week.

Again, this is a good example of why I keep recommending investors to be cautious. While the All Ordinaries Index is holding above 7000 points, we can be reasonably confident that it will be more bullish in the weeks leading up to the end of the year and into early 2023. That said, I do expect it to fall in the short term for at least one week, which is likely to occur in the next couple of weeks.

Right now, there are many stocks in the top 50 that look quite good, which points to a stronger market into 2023 with the Information Technology, Financials and Materials sectors likely to perform.

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