Markets May Be Volatile, But They Usually Rise After the Midterm Elections

Commentary

I don’t know about you, but I am glad the midterm elections are over, since, in my opinion, the importance of the election was overhyped, even though this was a landmark Democratic sweep. This election delivered two years of “gridlock,” which Wall Street prefers, historically. Also, the Trump administration front-loaded its agenda in the first two years, so this leadership change in the House and Senate should not derail Trump’s agenda on energy, AI, and other important drivers of U.S. economic growth. Even if there are (and will be) a lot of Congressional hearings on AI, I am not expecting growth to be impaired.

Gina Hinojosa, the governor-elect of Texas, has explicitly said the currently permitted data centers in Texas will be allowed to finish construction. This essentially covers all of 2027 and well into 2028. She said she will pass laws that ensure all “newly permitted” data centers for delivery in 2028 and 2029 will pay taxes and commit to no increase in power prices for consumers, as long as they don’t impact water availability and are constructed with union labor. So, I want to reassure investors that the widespread reports that data centers will be banned are fake news, partly fueled by Chinese propaganda.

In last week’s election, voters sent a clear message: They are not happy with energy prices and inflation. Even President Trump agreed, saying on Fox News, “The Democrats did a good job. They fought hard.” He even told The New York Times he was willing to work with Congress, which the stock market liked. The stock market also liked seeing crude oil prices fall from $96 to $88 per barrel after the election, on hopes Iran may negotiate after a report that their Supreme Leader was authorizing officials to negotiate. 

Here are the most important developments recently and what they mean:

– The shocking news about Nvidia CEO Jensen Huang’s affair with Alice Huang will pass. It was good that Huang admitted that he messed up and apologized. Since this is a Chinese “honeypot” spy scandal, it will persist in the news and rock Silicon Valley. I expect that both the U.S. government and the Nvidia board will clear Huang for the lapse in his personal judgment. Nvidia’s board said that there is “no reason to believe that either national security or Nvidia secrets were compromised,” and then added, “the board’s inquiry will examine all available information.” President Trump defended Huang and said he would “certainly take him” on his upcoming trip to China. Trump added that “I haven’t heard he’s done anything wrong.” 

– Taiwan Semiconductor (TSM) on Tuesday announced that its October sales rose 59.7% compared to a year ago, so the AI revolution is still accelerating, which bodes well for Nvidia and other TSM customers. The order backlogs for all the AI and data center-related stocks that I recommend continue to grow steadily, and there are virtually no signs of a slowdown, despite some of the political rhetoric and data center backlash. Since Pennsylvania and Virginia are major data center states, with Democratic governors, I do not expect that the incoming Democratic governors of Georgia, North Carolina, Ohio, and Texas will impede data centers. If anything, they will just possibly tax data centers a bit more.

– The Labor Department announced that the Consumer Price Index (CPI) in October rose 0.4%, which was higher than economists’ consensus estimate of 0.3%. The core CPI, excluding food and energy, rose 0.3% in October, which was also higher than economists’ consensus estimate of 0.2%. Energy prices rose 0.7% in October, while food prices rose 0.5%. This was the highest monthly increase in food prices since April, so this is a new concern after five straight months of moderating food inflation. Shelter costs (owners’ equivalent rent) rose 0.3% in October and remain a major inflation catalyst.  Overall, the CPI caused Treasury yields to rise significantly across the yield curve, so a December Fed rate increase is now fully anticipated.

– There are negotiations underway in Abu Dhabi with Jared Kushner and Steve Witkoff. The U.S. is striving to renegotiate European security to expedite a ceasefire and eventual peace agreement between Russia and Ukraine. Naturally, this has outraged most European countries, since Russia wants to renegotiate Europe’s defense and security policies. Since Europe has expanded the war from just defending Ukraine to attacking Russian infrastructure, the U.S. does not want to be associated with any European proxy war with Russia.

In the end, the shocking news about Jensen Huang will pass. I have no intention to sell Nvidia, since there are no better stocks to invest in. I recommend that everyone hold Nvidia through its latest earnings announcement. In my opinion, Nvidia is a great near-term buy. I should also add that I never sold Super Micro Computer (SMCI) when it went through its rough patch, since the analyst community never cut its earnings estimates. SMCI now trades at 4.1 times forecasted earnings, while NVDA trades at 11.1 times forecasted earnings. Clearly, these are bargain-basement valuations that I will never see again in my lifetime.