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Trump calls stock market decline "a little pause," yet investors fret

The signs of a bear market
Stock market decline: The signs of a bear market 01:28

President Donald Trump addressed the October stock market swoon on Tuesday, describing its 9 percent decline as "a little pause."

Mr. Trump has been a frequent commenter on the stock market, although he tends to focus on Wall Street when shares are rising, pointing to the gains as evidence that his policies are working. October's swings have left the market on the verge of a correction, the term for when stocks decline by more than 10 percent. Mr. Trump had largely remained silent on the downturn -- until Tuesday morning.

"The Stock Market is up massively since the Election, but is now taking a little pause," Mr. Trump wrote on Twitter. "People want to see what happens with the Midterms. If you want your Stocks to go down, I strongly suggest voting Democrat."

The Dow Jones Industrial Average rose more than 220 points, or less than 1 percent on Tuesday morning, buoyed by some positive earnings and a strong consumer sentiment report. Yet the Dow had shed almost 9 percent of its value after reaching a recent high on Oct. 3 through close of Monday trading. Investors are fretting about trade tensions sparked by Mr. Trump's tariffs, disappointing tech earnings and rising interest rates. 

"There are no shortage of worries for investors," wrote Joe Quinlan, head of CIO Market Strategy at Bank of America, U.S. Trust on Friday. "And then there's the mother of all fears: now fragile global equity markets and the sinking feeling that the great bull market in U.S. equities appears to have exhausted itself."

While Mr. Trump may be proved correct that October's market decline will be brief, the market is notoriously difficult to predict. Regardless, some economists point to an expected slowdown in the GDP growth rate as a headwind for investors, with Capital Economics predicting the S&P 500 will shed 15 percent of its value from its recent peak. 

Politics and the market

Mr. Trump's assertion that the market will decline if Democrats win Congressional seats in Tuesday's election may be bluster ahead of the midterm elections. Yet there is some historical evidence that a divided government -- when opposing parties occupy the White House and Congress -- could blunt price appreciation for some stocks. 

Small-cap stocks rise 9.5 percent on an annualized basis when a divided government is in power, less than half the 21.8 percent gain they enjoy when one party holds both the White House and Congress, according to an analysis from Goldman Sachs earlier this year. Large-cap stocks see a slightly smaller impact, rising 10.8 percent under divided governments versus 16.4 percent when the two branches of government are controlled by the same party. 

And don't discount the impact politics have on investors' optimism. No surprise, investors and consumers tend to be more sanguine about the future when their party of choice is in power. That can inform their investing decisions, with Republicans increasing their allocations to the equity market after Donald Trump's 2016 victory, likely due to optimism about the economy under his leadership, researchers found earlier this year. 

But investing on political outlook can lead to unwise investment decisions, warned UBS in a Monday research note. 

"Whatever your political views, we advise against making any major investment decisions based on political forecasts or beliefs," its analysts noted. "Political bias can significantly hamper investors' ability to make prudent investment decisions—especially if they allow political disappointment to morph into investment pessimism or fear."

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