Blog   Tagged ‘U.S. economy’

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 to 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, 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 year promises to be interesting on multiple fronts—and while the candidates are busy making the case for why they should be elected, we wanted to get to the bottom of one question: How does a presidential election affect returns in the stock market?

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

The bottom line: Expect volatility whenever you see uncertainty, but as this pertains to election cycles, it usually clears up quickly.

Political Rhetoric

As politicians campaign, they need to gain 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.

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.

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.

DEMOCRAT OR REPUBLICAN:
MARKET RETURNS
POLITICAL POWER GAIN/ANNUM % OF TIME
Democratic President 7.9 47.2
Republican President 3.0 52.8
Democratic President, Congress Split 10.1 3.3
Republican President, Congress Split -4.2 10.6

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 presented this data to a group of investors and a 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.

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 flare up, they either positively or negatively affect the market. So is it fair to say the current president is totally responsible?

Is This Time Different?

This election may be different. This year we have a candidate who represents the establishment and a candidate who represents the anti-establishment.  I’m fairly confident that not all of the actions and policies touted by the candidates 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.

And, remember: the president must work with Congress to get things done. 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, 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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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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Strength of the U.S. Dollar

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Our Chief Investment Officer answers your questions about the strengthening U.S. dollar:

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The Positive Side of a Strong Dollar?
Throughout the past few quarters, the strengthening U.S. dollar has been gaining a lot of investors’ attention. An appreciating dollar can be both a blessing and a curse. I’ve noticed that much of the news has focused on the negative impacts of a strong dollar. Many corporate CEOs have cited the strength of the dollar as a headwind to their earnings growth. Today I will spend a few minutes on a different perspective: the positive side of a strong dollar.

What drives the U.S. Dollar?
The value of the dollar is a function of relative economic strength. So it’s not just about the Federal Reserve action or domestic economic growth, it’s also is a function of global growth. I believe the global economy is the primary driver of the dollar’s recent strength. Historically, faster-growing economies have rising currencies due to capital inflows. A strong dollar has been associated with slower global economic growth, because the dollar remains the reserve currency.

Pros and Cons?
Even though most of the headlines cite a strong dollar as a negative, there are some positive effects.

  • Typically with a strong dollar comes lower commodity prices. This is positive for the consumer, as energy costs decline.  And businesses benefit if commodities are an input variable.
  • The United States is a net importer; we import more goods than we export. Less expensive imported goods and services will increase consumer confidence and spending. Businesses buying imported raw materials or components may increase their margins or pass on savings to consumers.

What does a strong dollar mean to the U.S. economy and markets?
A strong dollar will transfer demand from the U.S. economy to economies around the world. This will negatively impact some industries, where exports represent a significant portion of their business, such as industrial conglomerates. However, other industries, focused on the domestic consumer, will benefit.

Given our forecast of an improving global economy, whether it’s actual green shoots of economic growth in Europe, or the hope of economic stimulus in China, I believe we’ll see the dollar stabilize for the remainder of the year.

I don’t believe a strong dollar will derail our market forecast.  Historically domestic equity markets have performed well in periods of both a strong or weak dollar. The message here is the dollar is not the primary driver of stock prices and I would expect the S&P 500 to post returns in the 7-10 percent range in 2015.


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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Scarred by Great Recession, small business owners are still playing it safe

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SmallBusinessOwners

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