Is someone advising President Donald Trump that this may be a good time to push for tariffs and the threat of a trade war?
On the surface, it doesn't seem to make much sense for the stock market. The two quarters we are in now (second and third) leading to the November midterm elections are the worst two quarters of the entire four-year (16 quarter) presidential cycle. Since World War II, they are the only quarters that average successive declines for the S&P 500, falling 2.2 percent and 0.9 percent respectively, according to the Stock Trader's Almanac.
With a seasonally lousy period for stocks, it sure seems like an odd time to start a trade war, but some strategists appear to be clinging to the hope that Trump's get-tough policy on immigration and trade are designed to appeal to voters in the midterm election and that with a strong economy Trump can afford to press the issue for a few months, even if the market drops, then compromise after the election.
Trump would certainly have history on his side: traditionally, stocks trade down in this time period but rally going into the fourth quarter.
"We believe it is important to remember that there is a process for these tariffs to go into effect, and most of them take 60 days from the start of the process," Strategas' Daniel Clifton told investors recently.
The long lead time, Clifton implies, may give Trump room to push tariffs through the summer, right up to the November elections. "We are a long way from all of the new proposed tariffs coming into effect and some are after the midterm election (which we think is significant)."
What's amazing about the midterm slump is that it has been invariably followed by a rally: October of the midterm election year is the best performing month in the four-year cycle and the average quarterly return is 7.5 percent in the fourth quarter, Clifton notes. Wait, it gets better: The S&P 500 has not declined in the 12 months following a midterm election and the average one-year return has been 15 percent.
Here's another amazing fact: The rally happens regardless of which party wins or loses the election.
With odds like this, it suddenly doesn't sound so crazy for Trump — who has made it clear he cares very much what the markets think — to push the threat of a trade war.
That, of course, assumes that Trump can manage the threats and blusters and produce a compromise on or around the elections.
Regardless, Clifton acknowledges the risks are now much higher: "[T]he stakes have been raised," he said.