The mid-term elections are imminent. Most everyone is tired of the politics, the ads, the accusations, the phone calls, the text messages. Not to mention sticker shock at the gas pump and grocery store. What does all this mean for your investments?
The economy grew in the third quarter by 3.4% year-over-year. This is a full 1% higher than in the second quarter. This is a good thing. Yes, part of this growth is inflation, but the consumer is still spending money. How, you may ask since wages are not increasing as fast? The primary answer is that the consumer is saving less now than a year ago. Good for the economy but not necessarily good for the longer-term future of the consumer.
Personal Consumption Expenditures (PCE) is what we are paying for goods and services. In Q3, it was 3.6% higher than a year ago. The Producer Price Index measures wholesale prices. The PPI was up 6.3% in September verses the previous year if you include food and energy or 5.0% if you exclude volatile energy and food prices. No surprise to any of you…stuff is costing more.
On the jobs side of the discussion, unemployment is hovering near a sixty-year low. However, if you are looking for a job, it is no surprise to you that few companies are hiring…but also there are very few layoffs happening (yes, you are hearing about layoffs in the news but they are actually not significant in the overall picture --- unless you are the person who just got laid off). This is what is meant in the financial news when you hear the phrase “low hire and low fire.”
These items are a mixed bag. The economy is doing well. Probably too well. That is why inflation is running well over the 2% target of the Federal Reserve for the past five years. That is the reason we are seeing interest rates going up on everything from mortgages and credit cards, to the rates major companies pay to borrow money for expansion, or the rates the U.S. government has to pay to borrow money to finance the ever-increasing federal debt (that is another conversation for another day).
If you are starting to think I am talking doom and gloom, you are wrong. Facts are facts. But how you look at them can make a big difference.
The economy has been robust since COVID. Lately, perhaps a bit too robust leading to inflation. Lenders then demand more interest for the loans they are making. This in turn leads the Federal Reserve to increase the rate they charge to banks to loan them money. All of this is meant to make companies and individuals pause and think carefully before they borrow more money. The result is a slowing down of the economy before it overheats.
Bottom line. The economy has been good since the Covid shock and our investment portfolios reflect that over the past five years.
But what is next?
Despite all the concern, emotional dread, or maybe even fear about the what the near-term future will bring, always remember that fundamentals drive the stock market. As Kai Ryssdall on Marketplace often says: “The stock market is not the economy and the economy is not the stock market.”
When I use the phrase “fundamentals drive the stock market” I mean, “what are the profits a company is earning today or projected to earn in the next year.” For Q3 2026, S&P 500 companies are reporting a blended year-over-year earnings growth rate of 29.5% with about 24% of index companies having reported actual results. Allow me to repeat that. Of the companies who have reported earnings for Q3, the growth of their profits is up nearly 30%.
Are the stock prices up 30%. Not even close. But if profits are up 30% why are not the stock prices up by the same 30%? The companies should be 30% more valuable, right? Price is relative to what investors are willing to pay today. Sometimes that price is a truer reflection of “value” but sometimes it is not.
The earnings or profits of companies in the S&P 500 have grown year-over-year from 9% to 54% since June 2024. Yet the index has not increased by that much.
Yes, market prices are near a historic high. Remember, price is not always a true reflection of value. The forward P/E ratio (price relative to earnings) of the S&P 500 in September 2026 was 19.7. One year ago, in September 2025, that ratio was 23.8 and in June of 2024 the ratio was 22.2. The higher the ratio, the more expensive the stocks relative to their profits (value). The lower ratio today means that stocks are cheaper now than in Sept 2025 or June of 2024
So, yes stock prices are high today. But those same shares are generating higher profits. Eventually, investors look at value and not prices to make investment decisions. Of course, those decisions are colored by the “noise” of politics, global conflicts, inflation, interest rates, etc. But the ship will right itself, and investors will look at how much profit each and every company is making and buy companies that can generate the highest profit today and hopefully into the future for the money they are investing.
Not that history always repeats itself…and I’m not saying it will…but it was recently pointed out to me that on average, across all 19 mid-term elections since 1950, the average one-year return was a hefty 15.1% after that mid term election. No guarantees, not a prediction. But it is an interesting fact. We will know in a year.
https://finance.yahoo.com/markets/stocks/articles/us-stocks-done-every-midterm-114500900.html
Our advice is pretty basic. Control what you can control. Plan your cash needs for at least two years in advance. The money you will need to spend in 2027 and 2028 should be in money market funds. This means that hopefully you don’t paint yourself into a corner and need to sell when markets are down. Sell when it is to your advantage to sell. Markets go up and down as they always have and will continue to fluctuate. But the trend is up in eight of ten years going back to the 1930s.
If could recommend a source for unemotional news regarding the economy and the markets, I would suggest Marketplace on NPR.
https://www.marketplace.org/shows/marketplace
Wollman Wealth Designs, Inc is a financial services and investment firm in Escondido, CA partnering with families, friends and clients in San Diego County and around the country. Please visit our website, call the office or send us an email with your comments or questions.
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