Blog   Tagged ‘Senate’

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.

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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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Janet Yellen: The Next Chairperson of the Federal Reserve

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Janet who? Janet Yellen, the seemingly-unknown current vice-chairperson of the Federal Reserve(the Fed), was nominated by the President to succeed Ben Bernanke after several White House favorites were first considered. Bernanke, the current chairman of the Fed, is vacating the position he has held since 2006 at the end of January 2014.

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Yellen now awaits the Senate confirmation process, which she should easily glide through as the Republicans appeared to support her as a candidate while the President sought alternative contenders earlier in the process. She appears to have a very good track record on judging appropriate policy. Whether a dove (low rates and inflation) or a hawk (inflation a threat), what’s important is supporting the appropriate policy at the appropriate time…which she has done. She is battled-tested, having worked in key policy roles through both the Asian financial crisis in 1997and the recent global financial crisis.  She has spent most of the past two decades as a leading voice within the Fed, initially as a member of the Federal Reserve Board of Governors, then as president and chief executive officer of the San Francisco Federal Reserve Board, and over the past four years as vice chairman of the Federal Reserve.

We think Yellen, like Bernanke, may view the risk of the economy becoming stuck in a low-to-moderate growth path great enough to provide ongoing risk insurance, such as delaying the tapering of quantitative easing or even, if necessary, providing additional stimulus.

Yellen is characterized by those who know her as a brilliant thinker who focuses on the human side of economics.  As vice chair of the Fed, she was credited with forming the Fed’s communication policy including the chairman’s quarterly press conference. This press conference – and communication in general – may become more critical as we transition from a period of large-scale asset purchases to one of strong “forward guidance” from the Fed. Yellen has also been a proponent of maintaining the Fed’s zero interest rate policy and continuing the Fed’s asset purchase program.

If confirmed, she will be the first women to lead the Fed.  We think she is extremely qualified and will do an exceptional job.  We don’t expect much change with respect to the current Fed policy, and neither does the market. Upon her nomination in early October, the market let out a big yawn; markets didn’t move much then and haven’t since.

 

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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