Why Investors Shouldn't Worry About The Midterm Election

#Ask Payne?

(From my show, ‘Making Money with Charles Payne’)

Question: A lot of people are worried about the midterm election, including a 90-year old retired U.S. Navy Seaman, who sees a correction, and is looking to buy bonds on weakness.

Answer: There is always something to worry about, but even when the Democrats controlled the White House, the Senate, and the House of Representatives, the stock market began its rebound that continues almost a decade later.

I think the GOP will hold the Senate and 50-50 in the House of Representatives. However, the kind of economic momentum built into the system is going to carry this economy through 2019. This is the virtuous cycle the Fed couldn't fabricate with trillions in money printing. 

Even if the GOP lost the Senate, the Democrats couldn't take away any of Trump's stimulus moves on regulations and taxes. The market rally could stall, and there will be dips and air pockets, but the underlying fundamentals are amazing and not completely built into the stock market.

Lackluster

Tuesday was a very lackluster session for stocks, somehow matching the persistent drabness of a rain-soaked New York City, where the only fireworks came from inside the United Nations building. Market breadth wasn’t impressive, although it was better than Monday.

And yet, there has been one constant as the market was grinding to new all-time highs and this week, as it meandered and consolidated those gains.

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There are always some stock indices that are higher, as investors continue to rotate instead of heading completely to the sidelines.

The relationship of all these moves is very curious. In February, the threat of a 3% yield on the 10-year Treasury yield sent equities into a tailspin. I suspect the big move to 3.10% is presenting a speed bump - particularly for blue-chip names and certain interest-rate-sensitive sectors, especially Utilities (XLU) and Real Estate(XLRE), down 2% and 3% over the last two months.

At some point, higher yields become more than speed bumps for the market, but I think it’s not a serious threat with a three-handle.

Consumer Confidence

One of the biggest reasons for this is the American consumer. Consumer Confidence continues to soar, now approaching an all-time high of 144.7 back in 2000. The 138.4 headline was significantly above 132 estimates.

Moreover, there was a sharp jump in “jobs plentiful” to 45.7% from 42.3%.

Consumer Company Earnings

After the close on Tuesday, three names that give is a hint to the consumer, including Dow Component Nike (NKE). The athletic footwear and apparel giant posted results above the Street on revenue and earnings, but I suspect analysts were looking for a more robust beat.

In the last five quarters, the % earnings beat has dwindled to only 6% for the most recent quarter:

• 18.7%
• 15.0%
• 28.3%
• 7.8%
• 6.3%

Moreover, it’s hard to see where that controversial ad had a major impact on North American sales, where footwear revenue only improved by 5%.

KB Home (KBH) beat big time on earnings and margins, which came in at the high end of guidance.

Cintas Corp (CTAS) crushed and offered robust guidance. The day after the election, I told folks to buy this stock as a proxy on Americans going back to work. The stock was hit hard in after-hours trading, but it has been a grand slam.

Consolidation continues in restaurant stocks with the massive Sonic Drive-In deal (SONC). We are looking into the restaurant space for the next big potential takeover candidate.