Advisor Insights Market News Weekly Market Commentary

Market Commentary: October 25, 2016

Behold the BIGLY anticipated quarter!

Written by: Benjamin Bimson CIMA® / BCJ Financial Group

Until this week, I didn’t know that “bigly” was ok to use. I don’t know about you, but I honestly thought it was not a real word. According to Kory Stamper, a lexicographer for Merriam-Webster, it is in fact a real word. It is going to be used now bigly. If nothing else, it makes me smile. It is a funny word.

So one question about this quarter is the presidential election (perhaps the largest question). We cannot dodge the reality that it does matter to the markets. It matters… bigly. Normally the focus would be on more mundane things that are seasonal, but in an election year, the main event for the 4th quarter is who is going to win and what will that mean for the markets and the economy as a whole.

It can be hard to tell the difference between coincidence and correlations when looking at historical elections and combinations of which party controls the Whitehouse and congress. I think the following is a very interesting chart. First of all, it is colorful. That is always good. Secondly, markets tend to react and then move forward in general.

The numbers however do work out best historically when there is a Democratic president and a split congress. It is just how the numbers fall. That does not mean that every Democratic Presidency and every Split congress has been ideal, it has happened exactly once. The crash in 2008 when President Obama was first elected was the beginning of the only session where that particular case is observed in this chart. For what it is, the chart is below.

 

Source: Ned Davis Research Group

Source: Ned Davis Research Group

 

To argue that the analysis predicts what would happen whether Hillary Clinton or Donald Trump wins, is not necessarily something I would argue. These are simply the results of what has happened historically.

Plenty of what we are experiencing economically and politically worldwide is not the same as it was before. We do not want to over-simplify the world by proposing that what exactly happens next is a simple combination choice. This election is certainly unusual. This economic expansion has been unusual. The current Federal Reserve Monetary Policy has been unusual as well as what has been going on in Asia and Europe.

What most people do understand is that until we know what our leadership is going to look like, very few are willing to make huge bets in the market. We have been largely unchanged in nearly every asset class for the past 3 months. The following chart shows the rolling three months returns for the Dow Jones Industrial Average, S&P 500, NASDAQ, All Country World Index (ACWI), 7-10 year US Treasury bonds (IEF), Barclay’s Aggregate Bond (BNDS), and Gold (IAU). The holding pattern and drifting is evident.

 

2

 

It does in fact appear that the markets are poised to react. The next major catalyst is the Presidential election with the anticipated December Fed meeting following shortly behind. Even the indicators that we watch most closely are drifting from moderately bullish to more of a mixed reading. While it is important not to try and guess and gamble, it is also good to have a plan for what may happen next. This is what we are firmly committed to providing for our clients. Data drives our decisions, and being patient for data is sometimes a difficult thing to do, especially when we know that it can affect us BIGLY.

 

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