DJI and XAO to Rise Post the Midterm Elections

Last week the US had their midterm elections and with the Dow Jones down around 10 per cent for the year, many are looking for positive news to drive the market higher. Given this, it’s timely to review how the midterm elections will effect the Dow Jones Index and the All Ordinaries index.

Why will the US and Australian markets perform strongly?

Looking back over forty years from 1982 when Ronald Regan was the US President to 2018 when Donald Trump was the president, there have been 10 midterm elections. On nine occasions, the Dow Jones rose the following year while in 2015, when Barrack Obama was the president, the Dow Jones fell just 2 per cent.

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

Probability suggests there is a 90 per cent chance the Dow Jones will rise in 2023 and while we only analysed the midterm elections over 40 years, the data also indicates that the rise in 2023 is likely to be strong and in the order of 20 per cent 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 per cent 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.

What were the best and worst performing sectors last week?

The best performing sectors included Utilities up 15.16 per cent following the takeover bid for Origin Energy, which saw it rise over 36 per cent on the news. This is followed by Materials up 8.63 per cent and Healthcare up 5.60 per cent. The worst performing sectors included Energy down 2.42 per cent followed by Information Technology up 0.42 per cent and Financials up 0.92 per cent.

The best performers in the S&P/ASX top 100 stocks include Origin up 32.06 per cent followed by Evolution Mining up 29.85 per cent and Northern Star Resources up 16.78 per cent. The worst performing stocks included Whitehaven Coal down 19.36 per cent followed by James Hardy down 9.61 per cent and Xero down 6.41 per cent.

What's next for the Australian stock market?

Until last Friday, the All Ordinaries Index had mirrored exactly how it unfolded the week prior with the market rising Monday to Wednesday before falling away on Thursday. But that all changed on Friday when the Australian stock market rose 2.86 per cent.

There are two important points to take notice of here, the first is that the close on Friday is the highest we have seen since August and, secondly, it is the strongest week we have seen in five weeks. Once again, this is a good example of why I keep recommending investors be cautious given that on one day the market is weak while on another it’s bullish.

What is exciting is that the All Ordinaries Index is now holding well above 7,000 points. Given this, we can be reasonably confident that the market will be more bullish in the weeks leading up to the end of this year and into early 2023. That said, I am expecting the market 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 are looking quite good, which is pointing to a stronger market into 2023 with the Information Technology, Financials and Materials sectors likely to perform.

For now, good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.