Let’s all go ahead and be emotional and let out a big scream. Arrrrrrrrrgh! These stock markets are really frustrating. After a lackluster 2015, equity markets are down around 10% in 2016. Of course, a balanced account might “only” be down 5% in 2016, but that still doesn’t feel good. Aren’t markets supposed to rise in Presidential Election Years?
Generally, that’s true. Since 1933, the S&P 500 has risen 8% per year in election years.
The simple fact is that politics is likely having a big impact on the markets. Certainly, investors are concerned about the price of oil, slowing world economic growth and China. But, a major part of the anxiety is very likely being caused by the presidential race. It’s similar to the impact that the Ebola scare had on the markets in mid-2014.
Think of it. In a normal election year, whether we are Republican, Democrat or Independent, we find a candidate that we think can make a change for the better in the U.S. and perhaps the world. We support that candidate with the hope and the optimism that things will be better after the election. In part, this typical election year optimism has helped produce historically good returns. Hence, there appears to be both a correlation between election year and good results and a likely causation.
So, what do we have now? Two political outsiders whose popularity has been largely anti-establishment. Donald Trump’s and Bernie Sanders’s victories in New Hampshire were seen as a vote of no confidence in the nation’s economy and the political status quo. Yet, while their supporters are happy to show their anger at the current situation and hope for change, neither candidate has any proven track record of being able to accomplish on a nationwide level what they propose.
Investors of all kinds are skeptical and concerned. The two “establishment” candidates, Jeb Bush and Hillary Clinton, are struggling. There is a real question as to what would happen if Trump or Sanders was elected. This has likely helped spook investors, big and small.
Remember, too, that Mr. Trump is, according to the NYT, strongest among Republicans who are less affluent and less educated. Mr. Sanders appeals to a wide variety of people and has raised millions of dollars of support without the aid of a Super PAC. In Tuesday night’s victory speech, he thanked his more than one million supporters who contributed an average of $27 to his campaign. Their supporters are not your typical investor or Wall Street firms. Hence, this optimism generated by both candidates from their supporters doesn’t translate to typical election year investor optimism.
Then we have the omnipresent media. Every day we are besieged by the newspapers, TV and other sources filled with political content, much of which is pure useless trivia. Most candidates are all quite happy to drone on about the current problems and how they alone have simple solutions to fix everything. Educated people and institutions who represent the bulk of investors aren’t buying it. The result: a gradual, “grinding” downward slide that is worse than a fast panic-driven rout. It’s like everyone is bringing up the negative over and over and the “Group Think” pushes the equity markets down.
Brett was on a Goldman Sachs conference call yesterday discussing market volatility. They reiterated what Schwab, BlackRock and others have said. Yes, there continues to be concerns about China, credit/rates, oil, and expectations of monetary policy. They think there is a 15% chance of recession in the next 12 months. Which is good because any year on average is 24%. They summed it up this way, “There is a disconnect between fundamentals and what the market is saying. Take it easy, stay disciplined, stay diversified, and stay invested.”
We agree, the markets may continue to be choppy for 2016, particularly if a viable, experienced candidate, known and trusted by the investment community doesn’t move to the head of the pack. In the meantime, we suggest you let out a big scream and wait for the markets to swing back and catch up with the fundamentals. We know they will, we just don’t know when.