Blog   Tagged ‘congress’

The presidential election and the stock market

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Stocks always react differently during an election cycle. A piece of advice we give clients is look for election-neutral stocks. Hear some of my thoughts on how stocks are performing this year from a recent visit to CNBC studios and read more below.

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Elections matter.  After all, they determine whether a Republican or Democrat sits in the Oval Office on Pennsylvania Avenue, but do they predetermine a bear or bull  market on Wall Street?

If history teaches us anything, there is one thing investors can count on during an election year, and that’s an upcoming period of uncertainty in the markets. The mere suggestion of a change in power to the highest-ranking office in our country can leave plenty of room for speculation about the future of the economy, trade relations on a global scale, and the policies that will impact how consumers live, work and spend.

2016 promises to be interesting on multiple fronts—one of them being the political environment, as this is a presidential election year. While the candidates are busy making the case for why they should be elected, we wanted to get to the bottom of one burning question: How does a presidential election affect returns in the stock market?

In answering this question, we examined historical elections and markets through four different lenses.

  1. MARKET RETURNS AND THE FOUR-YEAR PRESIDENTIAL CYCLE

We all know the market dislikes uncertainty and it doesn’t matter what causes the uncertainty. Political uncertainty is no exception. Going back to 1900, we categorized each calendar year of market returns into one of four categories: the election year, the first year, the second year and the third year of the presidency. We discovered the third year in office was the best performing and the election year had the most uncertainty.

Stocks have struggled in the first half of historic election years, no doubt due to the uncertainty of the election and what a new president may mean to the economy and the markets. Typically, the market struggles early in the year when the political theater is at its highest, with numerous candidates still in the running. Consequently, the bottom of the market is linked to the timing associated with determining a clear winner. A few examples make the point: In 1996, President Clinton’s second term was not in question and the market only suffered a minor correction of 5 percent. In 2004, there was more uncertainty. Incumbent George W. Bush, running for a second term, was in a tight race with John Kerry. That year the market established a bottom in August. This graph illustrates the two races.

S&P 500 1996 vs. 2004

There are number of events that could reduce the volatility. First, a reduction in the number of candidates would reduce the uncertainty.  This happens naturally, typically by mid-summer after the conventions, when we are down to two remaining candidates. Volatility could also be greatly reduced if the candidates clearly articulated their ideals, plans and execution strategies. Perhaps we shouldn’t count on that occurring in this election.

The choppiness of the markets in the first two months of 2016 appears to be standard operating procedure when compared to historical market action in an election year. The bottom line: Expect volatility whenever you see uncertainty, but as this pertains to election cycles, it usually clears up quickly.

  1. POLITICAL RHETORIC

As politicians campaign, they need to the voters’ attention. When the discussion turns to sectors and industries, markets react—sometimes temporarily or sometimes longer-term. In any case, the impact is seldom as bad as the language being used.

For example, one candidate has publicly announced her war against high drug prices and supports importing prescription drugs from Canada. Even though nothing has been finalized and perhaps these suggestions may never be executed, pharmaceutical stocks and biotech stocks sold off.

Another candidate, a Democrat who espouses democratic-socialist ideals, has made the comment, “If I get elected, I will be Wall Street’s worse nightmare.” You can imagine what has been happening to the financial sector as this candidate’s popularity gains momentum.

A perfect example of this is the Affordable Care Act. This legislation was signed into law on March 23, 2010. Initially, there was massive uncertainty as employers and investors analyzed and interpreted the new law. In 2010, the S&P Health Care Index was up a mere 0.7 percent, managed care increased 8.3 percent and the S&P 500 was up 12.8 percent. As I previously mentioned, this market reaction proved temporary as the positive financial impact of the Affordable Care Act began to assert itself on the companies’ bottom lines. So looking at the next 12 months, returns reversed. In 2011, the S&P Health Care Index was up a stellar 10 percent, managed care increased an impressive 32.9 percent and the S&P 500 was up only 2.1 percent.

  1. DEMOCRAT OR REPUBLICAN?

In the long run, markets are driven by economic fundamentals that trickle down to corporate earnings. In the short run, noise can influence markets. The data suggests that elections would be classified as noise.

We went back to 1900 and analyzed which political party in the White House produced the best returns in the stock market. Over this long period of time, Democrats won this contest, producing an average return of 7.9 percent. Republicans produced a return of only 3.0 percent.

I concede that this is a naïve way to analyze the data; however, the answer to the question of which party is best for the markets is inconclusive. I recently presented this data to a group of investors and a faithful Republican asked if the returns would be different if I lagged returns by a year. The question has merit and does change the results dramatically as the outcome would be completely opposite. Another argument is that Republicans have been penalized by wars and severe economic crisis. The depression in 1929 and the Great Recession in 2008 both began with a Republican president and ended with a Democrat president. When Hoover (R) was president from 1929 to 1933 the stock market was down 35.6 percent annualized. Fair enough, but data does not lie.

It becomes difficult to assign market returns to a specific president. For years, we have experienced mounting debt, an increase in terrorist threats and easy monetary policy. As these issues flair up, they either positively or negatively affect the market. So is it fair to say the current president is totally responsible?

  1. IS THIS TIME DIFFERENT?

This election may be different. This year you have candidates who represent the establishment and candidates representing the anti-establishment. Perhaps every presidential election starts this way, but today we are seeing the anti-establishment candidates moving ahead in the polls. Perhaps investors have every right to be nervous. Given the anti-establishment candidates’ popularity, investors wonder what tariffs on China and other trading partners would do to our economy and markets. And no one knows how deporting millions of undocumented immigrants would affect the economy. Further, who is to say what effect threatening banks or offering free tuition to public colleges would have? I’m fairly confident that not all of these actions would be a good thing for the markets. Keep in mind that what a candidate says they will do during a campaign is typically not what they will do once in the oval office. A candidate’s goal is to excite the voter base, increase voter turnout and gain a political advantage. Comments candidates make early on should not be taken at face value.

One cannot blame politics for the market’s recent debacle; there are many issues that are contributing to market softness. However, is it coincidental that as these anti-establishment candidates gain momentum, the market goes down?

Many years ago I worked for a U.S. senator and got a chance to see “how the sausage is made,” so to speak, and it’s not pretty. Perhaps this is all noise, since the president must work with Congress to get things done. Maybe our founding fathers built it right, with proper checks and balances, so a president with no experience hopefully cannot do too much damage. In 2017, the president will not have a free hand. If we have a Democrat in the White House, there is a good chance we will have a Republican Congress. If we have a Republican president, perhaps one with little political experience, he will have to deal with two experienced and successful leaders, Mitch McConnell and Paul Ryan,individuals who will not subordinate their policy views.

THE LONG AND SHORT OF THE MATTER

Elections are important on many fronts, but as far as markets are concerned there is a short-term effect and a long-term effect.

The only thing we can say conclusively about the market data is that prior to an election, markets tend to trade flat with higher volatility. After the election, the market has consistently delivered stronger returns.

In the long-run, the market’s preference for one political party over another is unclear. The data is clunky and incredibly sensitive to modest adjustments.

I would caution against using every statement and policy suggestion made by the candidates as a tool for guiding investment decisions. Rather, understand what history has taught us and refrain from making long-term decisions based on short-term emotions.

 

 

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This content is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Investment Management and the information available at the time this report was published.

All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Investment Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Investment Management does not guarantee that it is accurate.

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K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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Presidential Terms: What does it matter to the economy?

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It’s election day! Last week we gave you our take on the economic impact of midterm elections.

Now let’s talk about the effects of the presidential cycle.

See below for more…

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Elections and the markets
Investors want to know what the midterm election will do to the markets. Historical data tells us that midterm election years are historically poor performing years in the stock markets.

Let’s step back and review the presidential cycle. Here’s what we found from analyzing 142 years of data:

  • worst performing: year two
    • average return of 2.7 percent
  • best performing: year three
    • equity markets gain on average 12.3 percent

One possible reason for the poor performance in the second year of the presidential cycle (which is also the midterm election year) could be that policy makers remove stimulus after a presidential election, leaving  the worst of the restrictive policy in year two of the presidential term.

Does party matter?
I hear many complaints about a Democrat in the White House being bad for business. Of course, everyone has a right to share opinions, but I’ll stick to fact-based data. I make the assumption that stock market returns are a proxy for business conditions. Going back to 1901, using the Dow Jones Industrial Average as a barometer, the best-performing markets have occurred with a democratic president. Further, the average return under a democratic president is 7.9 percent versus 3 percent with a republican president.

What if we are correct and the Republicans control Congress with President Obama in the White House? What can we expect from the equity markets? Historically that separation of control produces the best returns in the Dow. The average return in that scenario has been 9.8 percent. The worst returns – 1.7 percent – have been seen when the Republicans are in total control of Washington.

Perhaps our founding fathers structured it that way, to ensure no single party would have total control, at least not for long. Perhaps the financial markets don’t like abrupt changes and uncertainty. Gridlock ensures nothing will get done quickly and any policy tweaks will be relatively small.

 

We cannot disagree with data, but keep in mind that elections do matter on many fronts. So find a way to tolerate all those campaign ads, and go out and exercise your constitutional right to vote. If there’s any silver lining to having your political party in control of one side and your opposing party the other, remember it may be a good thing for the financial markets.

 

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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Midterm elections: What does it matter to the economy?

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Elections are vital for more than just ensuring the democratic process (and inundating you with political campaign ads). They also decide which politicians will be making serious fiscal decisions for us. With the midterm elections being held next week, we want to discuss just how they affect the economy.

See below for more…

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Control change in Congress
The race worth watching in the midterm elections this year will be in the Senate. At this early stage we believe there is a slightly better than 50 percent chance that the Republican Party will win control of the Senate. As for the House, the Republican majority does not appear to be changing hands.

Currently, Democrats control the Senate with 53 seats and two Independents that both caucus with the Democrats. Republicans hold the remaining 45 seats.

Here’s the math that leads us to our conclusion that the Republicans have the edge this time:

  • 36 contested seats
    • 21 will go to the Democrats
      • These include seven Democrats in states that supported Mitt Romney in the presidential election. These seven states have substantially lower approval ratings of President Obama than the national average.
    • 15 will go to the Republicans
      • Only one of the Republicans up for reelection is in a state that President Obama carried.

Our research tells us that incumbency is a powerful thing.  During an average election cycle, 90 percent of incumbents win reelection. The Republicans need six additional seats to have the majority, which means it’s going to be close. This is why we put the odds at only slightly better than a coin toss.

What we find interesting is looking past the 2014 Senate race and into the 2016 cycle where we see the opposite happening. Out of the 24 Republicans up for reelection, seven are in states that supported President Obama, meaning the Senate may see a yo-yo effect in 2016.

Why it matters
Why does it matter if the Republicans control Congress? If they are in control, we believe Congress will focus its attention on a few major issues:

  • Spending and other fiscal issues – The debt ceiling will once again be a discussion point in March 2015. A Republican-controlled Congress may look for spending concessions.
  • The 2016 budget –The Republicans made a big deal out of the Senate’s failure to pass a budget in the past, so now it’s their turn to get it done. If Paul Ryan is Chairman of the Ways and Means Committee, we could see discussions around tax reform and changes to Medicare and Medicaid.
  • Immigration reform – This could be put on the back burner, which forces it to be addressed by our 2016 presidential candidates.

Stay tuned for part II of this topic on election day—November 4!

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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What does the new Farm Bill mean for you?

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Bill Watson, president of UMB Agribusiness, breaks down what you need to know about the newly-passed Farm Bill in this video.

For more information, keep reading below.

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Every five years, Congress passes legislation known as the Farm Bill that sets policy for our nation’s agriculture, nutrition and conservation. After being without a bill for the last two years due to Congressional differences, Congress recently approved the latest version of the Farm Bill. One of the most important components the new bill provides is consistency to the planning process, allowing producers to determine their probable cash flows and insurance coverage levels for the years ahead.

There are two major issues that arise with the new bill that require careful consideration for farm financial planning. Both of these issues can have a material impact on revenue streams and, consequently, on producers’ ability to cover debt payments and input costs in the coming years.

1)      elimination of direct payments

  • These were based on the number of acres farmers owned and not on the condition of their crops.
  • Impact on future cash flows: In many cases this may not be material, but in some cases where new increased debt levels may have stressed cash flows and debt coverage, this reduction in total income can have a serious, detrimental effect.
  • Producers need to work closely with their banks and financial advisors to review the impact of this change in forecasting the adequacy of future cash flows, and determining if changes in debt levels, loan terms or loan structure need to be made to accommodate lower future income levels. This should be done now rather than waiting until next year when the effect has already impacted the banking relationship. Being candid and straightforward with bankers and advisors as to any problems the reduced payments may potentially bring to operations will be critical for producers and their short- and long-term financial planning.

2)      new coverage types and levels for crop insurance

  • Now that there are no more direct payments, crop insurance will become the foundation of the new bill.
  • Producers immediately need to determine which option will work best for their individual farms. Farmers now have the option between two new insurance programs – Price Loss Coverage or Agriculture Risk Protection.
  • Price Loss Coverage pays the farmer or producer when the market price for a covered crop is below a fixed reference price.
  • Agriculture Risk Protection – makes payments to farmers when either the farm’s revenue from all crops or the county’s revenue for a crop is below 86 percent of a predetermined benchmark level of revenue.
  • In most situations, the best way to make the irrevocable selection between the two program options is to review how the options would have impacted specific farming operations throughout the last several years. By looking at several years, or by forecasting crop rotations into the next five years when possible, producers can determine which option will provide the best insurance coverage under a variety of potential circumstances.

Careful consideration of future operations, past insurance costs and coverage, and required levels of risk mitigation can yield significant improvement to overall farm income in the years ahead. Taking proactive steps to evaluate these areas with bankers and financial advisors will be critical in establishing a strategic plan and achieving the best outcomes financially possible for farming operations.

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


Mr. Watson serves as president of the UMB Agribusiness Division. He joined UMB in August of 2005 and has also served as the president of the UMB Kansas region. Watson is a graduate of Wabash College in Crawfordsville, Indiana with a major in Psychology. He has also attended The Colorado School of Banking, The National Commercial Lending School (where he has also been an instructor), and the Stonier Graduate School of Banking.



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