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@theMarket: Are Markets Predicting Obama Winner in November?
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Readers may recall that I have been using the historical performance date of the stock market during election years since 1900 to predict the market's direction in 2012, courtesy of Ned Davis Research. So far, that data had accurately predicted the markets ups and downs all year.
The data shows that the Dow Jones Industrial Average gains an average of 8.6 percent each election year when the incumbent has won. It gains less when the challenger wins. The Dow is up 8.8 percent year-to-date. In only three cases over the past 112 years has the incumbent party candidate gone on to lose after being up that much by the end of August. As such, I would say there is high probability (89.7 percent) that a Democrat will sit in the White House come November.
Of course, you may reject the stock market as an accurate predictor of the future. You may also choose not to base outcomes on probabilities; that is your prerogative. But as a stock market investor you may want to hope that the election-year indicator is correct. Here's why.
In last week's column, I stated that "Traditionally, stock markets are thought to do better under a Republican administration since their policies are normally more pro-business and pro-stock markets," but that kind of thinking flies in the face of reality. Kudos to a reader from Lenox Dale who supplied me with a wealth of statistics which show that stocks have historically fared much, much better under Democratic administrations. The S&P 500 Index has rallied an average 12.1 percent per year since 1901 when Democrats occupy the White House versus just 5.1 percent for the GOP.
The overall economy has done better as well with GDP increasing 4.2 percent annually since 1949 when a Democratic president occupied the Oval Office compared to 2.6 percent under Republicans. Our greatest stock market run occurred under Bill Clinton's watch (1993-2000), followed by the period 1981-1992 under the presidencies of Reagan and Bush.
But enough history, this week we made a little history of our own with all three stock market averages hitting new highs for the year. As expected, European Central Bank President Mario Draghi outlined the latest European rescue plan. The ECB intends to buy member nations' government bonds in exchange for further promises to accept outside oversight of their fiscal policies.
Then, on Friday the unemployment data came in weaker than expected. That immediately had gold flying in anticipation that it is all but certain that the Fed will ease next week at their Sept. 13 FOMC meeting. And my wish came true. I said I would like to see the S&P 500 Index break out of its weeks-long trading range and it did. It appears more upside awaits us.
Bill Schmick is registered as an investment advisor representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
The Independent Investor: Looking Beyond Election Speak
| "If you tell a lie big enough and keep repeating it, people will eventually come to believe it." — Joseph Goebbels, Nazi Propogandist
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Republicans warn of impending disaster if the federal government's house is not put in order. If we continue to do nothing about it, Romney, Ryan and the Republicans will most certainly be right. The question is whether the economy can survive the harsh medicine that these doctors prescribe.
The way to balance the budget, according to the GOP plan, is to cut income and corporate taxes, eliminate at least some tax deductions (no details), preserve defense spending (already larger than the next five nations combined), cut Medicare spending in the 2020s, trim other government spending and gradually shrink the deficit and balance the budget sometime over the next 10 years (yeah, right).
In my last column, I examined the fallacy of believing today's promises by politicians that don't come to fruition for a decade or more. Liberal economists argue that the Romney plan would boost unemployment by slashing public spending next year and the year after and most likely drive the economy into recession. But Mitt Romney knows this as well.
In an interview this spring with Time Magazine's Editor–at-Large Mark Halperin, Romney said, "... if you take a trillion dollars, for instance, out of the first year of the federal budget, that would shrink GDP over 5 [percent]. That is by definition throwing us into recession or depression. So I'm not going to do that, of course."
There is election speak at its finest. How far apart therefore are the candidates on what they truly intend to do about the economy?
In comparison, President Obama also wants to cut income and corporate taxes. Where they differ at all is in those who make over $250,000 a year. Obama wants to raise taxes on them while Romney doesn't. In the grand scheme of things, the amount of money that taxing the rich will generate will hardly be enough to make a dent in the budget. The real value is in generating drama and stoking voter sentiment with an "us against them" mentality. Occupy Wall Street would be proud.
Both candidates want to revitalize manufacturing, improve job training, make America energy independent and expand free trade. How they differ is on the margin. Whoever wins will most likely implement the same policies as their opponent.
Take energy independence as an example. The candidates would have you believe that if the U.S. were energy independent, pump prices would go down or at least the volatility in energy prices would disappear. Nothing could be further from the truth. Global markets set oil prices not the U.S. All energy independence would mean is that on the margin, U.S. companies would experience higher profits (and our government higher taxes) from higher oil and gas prices. Romney indicates he would rely on domestic oil and gas exploration including off-shore drilling to accomplish that independence. Obama would focus on fossil fuel exploration and development as well as alternative energy sources.
Where they differ the most is in how to reduce spending. Romney wants to cut government domestic programs that will ultimately impact lower and middle-class Americans on the margin more than wealthier Americans, while keeping defense spending the same. Obama would rather cut spending in both areas so that declines in spending would be a bit more modest.
As for regulation, Obama wants to enforce the Dodd-Frank financial regulations while Romney wants to repeal them. However, in the face of on-going wrong-doing by the nation's financial sector, the Romney campaign has been curiously absent in furnishing an explanation on how they would stop these continued abuses by the financial sector.
The point of this exercise is to separate fact from fiction, rhetoric from reality, in what I see as an increasingly confused and jingoistic campaign. Both sides seem to be relying more on one-liners than substantive explanations of policy. The use of misleading data, deliberate falsehoods and confusing statements intended to incite and confuse voters seems to be on an increase as well.
As such I feel obligated to try and make some sense out of this nonsense. In my next column, we'll look at how much power the president really has in implementing the grand visions they promise.
A note to my readers in the Berkshires:
I have volunteered to teach a course this fall at Berkshire Community College at the Osher Lifelong Learning Institute (OLLI). The classes will be on Mondays from 2:45-4:15 p.m. throughout September and October. The course, "America's Future: Buy, Sell or Hold?" will teach students to think critically about such events as this year's presidential elections, wealth and women, our education system and much more. There are only a few seats left. For more information or to sign up for the course call the OLLI office at 413-236-2190
Bill Schmick is registered as an investment advisor representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
@theMarket: The Fed Keeps Us Guessing
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The stock market, which has been climbing all summer in anticipation of another bout of easing, took the news in stride. The averages gyrated up and down but never really went negative despite what some perceived as disappointment. News out of Europe helped sustain the bulls and the averages. Expectations that the European Central Bank "might" further ease monetary conditions next week kept the markets buoyant. And if not Europe next week, the Fed could always ease at their next meeting in mid-September.
Grasping at straws might be a good way of parsing the rumors that surfaced on Friday that the president of Germany's Bundesbank has threatened to resign. Bulls were guessing that the only reason he would quit is if the European Central Bank was ready to provide more stimulus against the wishes of Germany. It was rather silly that anyone would believe this story, but consider the timing.
The rumor surfaced just hours before the Fed disappointed the markets. It also occurred on one of the slowest trading days of the year when volume was miniscule and participants were leaving early for the three-day Labor Day weekend. It sure smells like an attempt at market manipulation and it worked!
I have to hand it to the central bankers. Both Ben Bernanke and his counterpart in Europe, Mario Draghi, have learned the lingo that keeps the markets high and happy. Words like "fairly soon" or, in Draghi's case, "exceptional measures," when talking about future stimulus has worked like a charm. In these markets where nothing matters but the next fix from the central bankers, government officials are becoming adroit in parceling out just enough hope to keep the stock markets calm and trending upward.
The stock market has also been developing a more positive attitude thanks to the Republican convention this week. The most recent polls show Mitt Romney in a dead heat with Barack Obama. Traditionally, stock markets are thought to do better under a Republican administration since their policies are normally more pro-business and pro-stock markets.
Personally, I would like to see the S&P 500 Index break out of its present range, which has bounced between 1,400 and 1,426 throughout the month of August. It has been encouraging that the bottom level of support has held but so has the resistance at the top. This sideways consolidation is constructive since it has allowed the markets to work off any overbought conditions.
Clearly, no one has made much money in August. We are now entering September, considered the worst trading month of the year in terms of market gains. Some strategists are expecting as much as a 10 percent pullback. As I've written in the past, stocks could easily pull back 3-5 percent at any time, but that's about it. With both the U.S. and Europe's central banks promising to bail out two/thirds of the world's economies, any dip should be contained and simply provide an opportunity to buy equities at cheaper prices.
A note to my readers in the Berkshires:
I have volunteered to teach a course this fall at Berkshire Community College at the Osher Lifelong Learning Institute (OLLI). The classes will be on Mondays from 2:45-4:15 p.m. throughout September and October. The course, "America's Future: Buy, Sell or Hold?" will teach students to think critically about such events as this year's presidential elections, wealth and women, our education system and much more. For more information or to sign up for the course call the OLLI office at 413-236-2190.
Bill Schmick is registered as an investment advisor representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
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