Historically, the 12 months following a midterm election have been remarkably strong for stocks, with the market gaining an average 17.5% over the past 50 years.
And this latest bout of selling is giving me a chance to enter that window at cheaper prices.
But there’s also something unusual going on underneath the market. AI giants have raised more than $300 billion, soaking up an enormous amount of available capital and forcing stocks, bonds and other assets to compete harder for every remaining dollar.
Now that pressure is starting to ease.
In today’s Moneyball Economics, I’ll show you why I think this selloff has much more to do with the supply of money than some bursting AI bubble — and why I’m getting ready to jump back into this market with both feet.
Click below to get started:
Video Transcript:
Welcome to Moneyball Economics, I’m your host, Andrew Zatlin.
And frankly, I couldn’t be any happier with the recent pullback in the stock market.
You see, I’ve been planning on jumping into the market following this midterm election, and things just got a lot cheaper for me to do so.
Now, why is the election a trigger for me jumping back into the market? Well, because historically speaking, following a midterm election, the stock market goes on a major bull run. Over the past 50 years, the stock market generated 17.5% on average in the next 12 months and sometimes higher.
And who doesn’t love double digit growth?
But that’s not the only reason why I’m so bullish on the stock market…
You see, the central premise I’m following is economics, but maybe not the economics you’re familiar with. In the world of hedge funds, the economics I’m referencing is the supply and demand of capital because at the end of the day, a stock is worth what it’s worth because someone has the money to pay that price.
And that, my friends, is why the stock market has been so rocky.
The amount of capital available for the stock market, well, it’s dried up a little bit. See, a lot of people are saying, “Oh, AI got so rich and overvalued, and what we’re looking at is a price discovery. The prices are coming down.” Well, prices are coming down, but not for those reasons. We could argue that it’s overvalued, but that’s not a very strong argument.
Take a look, for example, at a major memory chip manufacturer called Micron Technology. Micron Technology is trading at a P/E of 12. And by the way, I’m coming out of the semiconductor industry. I know about cycles. We have not seen this bubble popping. We’re not on the downside of the cycle by any stretch of the imagination. To show you what I mean, a year ago, same quarter, Micron was generating $3 of earnings.
Next month, they’re going to report $40 of earnings.
That’s 13 times growth.
Right now, they’re P/E of 12. Next month will be a P/E of eight. Meanwhile, they’re growing by 13 times. There is not a valuation issue here. There is a profit-taking issue going on here. Folks, if you’re in the hedge fund world, micron technology has surged. Maybe you lock in your gains right now, especially when things are a little bit rocky. That’s what’s going on.
At the same time, the underlying issue of what’s actually affecting the stock market is competition for money, and it is AI related. Over the past year, all of these tech titans have basically sold stock or raised money in the bond markets to the tune of over $300 billion. It’s $300 billion. As a result of all this demand for capital in the short term, it’s blown out all other capital availability.
It’s soaked up the excess capital out there.
And so the bond market, for example, has to pay out higher yield in order to attract that capital. That’s why you’re seeing a lot of interest rate motion moving up. That’s why the yields have been moving up. It isn’t because of inflation. It’s because if you want to borrow money, you’re competing with Meta and Google and they’re willing to pay good money.
And quite frankly, they’ve sucked up a lot of the excess money. So whatever’s left, you need to pay more. So what’s happening now is then stocks that pay out dividends, they’re not competitive. I can go out and I can buy a US treasury bond and it’s going to pay me five, 6% guaranteed risk-free. I want better out of the dividends.
At the same time, the stock market has to compete with the bond market and it’s challenged there as well.
Now, while this is going on, this competition for capital, you also have other regional problems that are sucking away capital as well. For example, the China stock market is down 20% since June, massive collapse in demand. And a lot of this collapse in demand that we’re seeing, whether it’s because funding needs of AI, whether it’s China having problems, whether it’s France having problems, all these things create disruption.
It also creates weak hands that then lead to more secondary selling, and that’s kind of what we’ve been seeing. And that selling is just basically non-discriminating. Gold is down, silver is down, everything is down, but there’s a silver lining, so to speak. And that is we’re at the tail end of all this AI funding. And as a result, pension funds are going to start looking for places to park their money.
The cost of borrowing is going to come down.
The availability, a.k.a. Supply of money is going to grow and it’s going to flow into the stock market. After a couple of months, people are going to look at Makard and go, “How could we have missed this? This stock is super cheap.”
Folks, you want to be long and strong in this market. Timing, I’m going to wait for some of the secondary impact to hit. I think there’s still a couple of weak hands and we’re still going to see some softness, but I’m gearing up to jump in. I’m talking all the way into the deep end.
We’re in it to win it,
Zatlin out.
