Arrrrrrrrrgh!

sb frazzleLet’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.

A Christmas Carol: Oil-Style

640px-Marley's_Ghost-John_Leech,_1843I was awakened the other night by the Ghost of Christmas Past. He brought me back to times when a gallon of gas was over $4 and it cost me around $75 to fill up my car. He reminded me how back then we didn’t yet have today’s fracking methods of obtaining what was hard-to-extract oil from our American land. He also reminded me that the demand for oil was much stronger then, thanks largely to China’s growing needs. He showed me how it wasn’t so bad in that a new alternative energy industry was born with innovative companies working on hybrids, electric cars, and other things.

Then – poof – he was gone.

I regained my composure and wondered if what had happened was really true or just a dream. But before long another Ghost appeared: The Ghost of Christmas Present (“TGOCP”). TGOCP took me to the nearest gas station where I saw people with big grins on their faces filling up their cars for an average of $2.51/gallon (according to AAA). He urged me to fill up my car, that same car, that used to cost $75 to fill in years past. Low and behold, it only cost me about $40. Wow! That’s $35 I can spend on something else, TGOCP told me, stuff like clothes, smartphone gadgets, to use at the movies, or to eat out. If you’re like me and fill up at least once per week, this extra dough really can make a difference. TGOCP told me that basically this drastic reduction in oil prices is essentially a bump in salary for most Americans as it leads to more fun ways to spend our discretionary incomes. He flew me over to the nearest Wal-Mart and I saw delighted shoppers spending this extra money on all kinds of things! Wow, I thought to myself, stocks of retailers like Wal-Mart and Target must be really benefitting from this…

I told him how great this was and asked him to show me more, which he did by taking me to Norway. Not so many happy faces there. He said that this crash in oil prices isn’t a win for everyone. He told me that the big losers in all of this are oil exporters like Norway for whom commodity exports are some 20% of GDP. And that the currencies of oil producing nations, like Russia and Nigeria, get whacked in times like these which leads to drastic measures like Russia raising its key interest rate to 17% from 10.5% after the ruble’s sharpest daily drop against the dollar in more than a decade. Then he flew me to Wall Street where he showed me how this destabilization makes traders very nervous with the thought that it could lead to political unrest. He reminded me that there is always the fear that weakness overseas can wind up hurting the US since we are now such a global economy. While at the NYSE, he pointed out the share prices for energy companies and how many of them had fallen big time. He also pointed out the drop in high-yield bond prices as many of the companies in that space are linked to energy.

Yikes, stocks and bonds falling?!? Wake me up from this nightmare! Then – poof – he was gone.

I got a grip and assured myself that all of this was a silly dream, only for the Ghost of Christmas Future to come walking through my bedroom door. He said something about Marley this or Jacob that, and then grabbed me and brought me to Washington D.C. where some future Federal Open Market Committee (“FOMC”) meeting was taking place. Not sure how far off in the future this was, but Janet Yellen was talking about raising interest rates yet again. She was saying how these low oil prices were helping the American consumer appetite and keeping our economy heated to the point that they could continue to raise rates. Ghost of Christmas Future chimed in saying that he and his buddy Marley had been traders before and they don’t like talk of Fed interest rate increases…

I awoke. This time for real. It was the morning of December 17, 2014 and the Fed was going to conclude its FOMC meeting that afternoon. I pondered if these revelations were anything to hold a candle to and I awaited this afternoon’s FOMC remarks….

Editor’s Note: Oil is definitely a hot topic now and will probably be for a long while. We’ll keep our clients informed where necessary. In the meantime, have an excellent Holiday season and try to get out and see the real Christmas Carol, a Detterbeck family tradition for many, many years.