Electoral Lessons Could Be Valuable in Evaluating These ETFs

As of Wednesday, November 9, there were still some pending electoral outcomes, particularly in the western part of the U.S., that could tip the balance of power on Capitol Hill.

However, the big takeaway from the 2022 midterm elections is that an assumed wave for the Republican party didn’t materialize. Those are the breaks when, as of late November 8, no incumbents holdings statewide office, regardless of party, lost.

Market participants and political pundits can parse through the electoral results in the weeks ahead, and they’re sure to do just that, but investors evaluating exchange traded funds such as the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM) may not want to put too much weight on the results of the 2022 midterms.

“Historically, some analysis has shown that equity markets have tended to underperform in the runup to midterms and then outperform thereafter,” noted Morningstar analyst Dave Sekera. “This course of events would suggest that investors should underweight equity exposure prior to the election and then move to an overweight afterward. Yet, I suspect that this historical precedent is of little practical value today.”

Experienced investors familiar with QQQ and QQQM, the former’s lower-cost stablemate, know that these ETFs are languishing this year because growth stocks are being pinched by rising interest rates. That scenario was in place well before Election Day, and it’s also worth noting that even if change arrives on Capitol Hill, it won’t immediately damp out the high inflation that’s causing the Federal Reserve to boost borrowing costs.

In other words, potential resurgences by QQQ and QQQM aren’t likely to be rooted in politics, but rather in easing of macroeconomic pressures, among other factors. That is to say that investing solely based on electoral outcomes can be a fool’s errand.

“Trying to buy and sell stocks based on the party that will hold a controlling or blocking position in government is fraught with risks. Even if you correctly predict the outcome, the investment implications are far from certain,” added Sekera.

Specific to QQQ and QQQM, investors considering these ETFs may be best served by ignoring political noise and focusing on factors such as the high-quality traits offered by many of the member firms of these ETFs and the fact that many of those stocks are now trading at unusually attractive valuations.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.