FAANG Stocks Win The Midterm Elections

FAANG Stocks - Midterms Tell Us Economic Growth Is Strong

The table below shows the historical midterm election results where the President is in his first term.

In the 2018 election, the GOP lost about half of the House seats the Dems lost in 2010. They gained Senate seats unlike the Dems who lost 6 seats in 2010.

GOP lost less seats than the Dems because the Dems faced a tougher election map. Also the economy is much stronger in 2018 than in 2010.

Personally, I’m not in the business of making political opinions and predicting results. However, I do like to use the elections as an economic survey.

If the economy is doing well, the incumbents do well. If the economy is doing poorly, the challengers do well.

The economy was coming out of the financial crisis in 2010. But voters didn’t care about the direction of the economy.

They didn’t like their current situation which is all that mattered. Obviously, in 2018 the labor market is stronger and consumers are much more confident.

The 2016 election caught prognosticators by surprise. If you followed the economy, it wasn’t a shock that the challenging party won the presidency.

The economy nearly fell into a recession in early 2016 as manufacturing was very weak. It was starting to recover in late 2016. But that weakness was still enough to help the GOP in the Midwest.

Consider the popularity rating of President Trump and the fact that the ruling party usually loses seats in a president’s first midterm historically. Even with those, I think the GOP did well in 2018. This happened ultimately because of the strong economy, in my opinion.

FAANG Stocks - Big Election Winner: FAANG

Not many investors are talking about the FAANG stocks as a big winner from this election. But that’s my personal takeaway.

A divided government means less legislation will get passed. That lowers the chance new legislation will go against the big internet names. These are facing new taxes and regulations in Europe.

Another important positive from this election is Facebook, Twitter, and Google have come out of it relatively unscathed.

They tried to eliminate fake news posts to promote fairness. Since there aren’t many news stories on how bad these firms did, it’s a win. A bullet was dodged.

In a long term analysis of these businesses, investors probably needed to include the monitoring of elections as a big risk factor.

If these firms can avoid major controversies, that risk factor can be considered a one time event which won’t repeat every 2 years. The 2020 election will be another big challenge for these firms.

Really, the only way Congressional testimony hurts these internet firms is if they are followed by new restrictions.

As you can see from the chart below, the number of economically significant rules published in President Trump’s first year was down huge from President Obama’s last year.

Since Trump is still President, this is still a positive for all businesses. Low regulations are the one positive catalyst that will continue in 2019. The fiscal stimulus will mostly wear off.

FAANG Stocks - Labor Market Timing

The unemployment rate has been low since 2017. One key indicator is the year over year change in the unemployment rate. Once it starts increasing, it’s a big red flag to sell stocks. We haven’t seen that red flag go up yet.

As you can see from the chart below, the unemployment rate has been below the natural rate for 19 months. In the past 4 cycles, the unemployment rate has stayed below the natural rate for between 21 months and 50 months.

As you can see, even though the natural rate has fallen, the difference between the two is near a record high.

The labor market has changed dramatically since the 1970s because more women have entered the workforce. That’s why I only look at the data on the prime age labor force participation rate from the past 20 years.

Even though the unemployment rate and underemployment rate are historically low, I think there are about 2 years left for the labor market to grow. Prime age labor force participation rate has room to increase.

FAANG Stocks - Decent JOLTS Report

As I expected, the Job Openings and Labor Turnover report showed slight weakness in September.

The number of job openings in August increased from 7.136 million to 7.293 million. The September report was weaker and missed estimates. It showed there were 7.009 million job openings which missed estimates for 7.110 million.

Year over year increase in job openings fell from 18.1% to 12.5%. This is an example of solid year over year growth and weak sequential growth.

As you can see from the chart below, the job openings to unemployed and quits to hires ratios are both still historically high.

The number of hires fell from a record high of 5.906 million to 5.744 million. This isn’t a huge surprise because the hurricane hurt the labor market in September.

The October JOLTS report, which will be released next month, should follow the BLS report and show improvement. That gap between openings and hires fell from a record of 1.386 million to 1.265 million. I’d rather see that gap decrease because hiring increased not because openings decreased.

The quits rate is still at a 17 year high of 2.4%. This signals workers are still very confident in the labor market. There are now 5.964 million unemployed people actively looking for work. The labor market is very tight in the manufacturing sector.

As you can see from the chart below, the durable and non-durable manufacturing job openings are much higher than the peak last cycle.

FAANG Stocks - Conclusion

I think the strong labor market helped the GOP avoid devastating losses. Government is now divided which means there will be gridlock for the next 2 years. That’s good news for the FAANG stocks.

Google, Facebook, and Twitter got through the elections without a big scandal on fake news which is great news for them. The JOLTS report reflected the weakness in the labor market in September. It was also catalyzed by the hurricane. However, it should improve in October.

On a year over year basis and historically speaking, this was still a great report. However, once the labor market goes from great to good, it’s a huge red flag.

 

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