It’s 2016 – not 2008.
Written by: Benjamin Bimson CIMA® / BCJ Financial Group
Certainly there were a few people worried last week about another “Lehman Brothers moment” as the Deutsche Bank became the leading headline last week and drew initial concern that another financial shock was upon us (nearly 8 years after the collapse of Lehman Brothers). However, it was apparent by Friday that even to the general market that this was indeed not the financial shock they feared.
Deutsche Bank has certainly had a bad year, most of which can be attributed to an initial judgement earlier this year in favor of the US Department of Justice. The concern is that Deutsche Bank, who has appealed the initial ruling, expects to pay significantly less than the original judgment. However, they will likely have to raise capital at some level to pay the US government, and the fear is how much dilution of shares current stock-holders will have to shoulder in order for Deutsche Bank to settle the case. Thankfully, they have quite a bit in reserves and there is no real concern about the quality of their assets.
So why did the markets suffer so badly right after Bloomberg reported that some hedge funds had removed excess cash from Deutsche Bank’s derivatives-clearing accounts? I think it points directly to the ever-present fear that a 2008 can repeat itself, and everybody wants to avoid that pain again.
One thing to note is that markets fail to collapse when it is the one thing many people fear will happen at any moment. With this said, markets are likely to stay on edge until at least after the presidential election.
Ned Davis Research did an interesting report on how the Dow Jones performs when presidents from various parts of the nation are elected. Certainly it is not a rule, however, it does give insight as to how Wall Street might react to depending on if Trump or Clinton is elected. Below is how the study views the various segments of the US.
Under this model, Clinton is a Yankee candidate and Trump finds his support from Dixie. Below is how each president since 1900 has been classified and average returns during those presidencies.
One thing that can be noted is that it is not a rule what will happen under each president. There have been outlier years for both Dixie and Yankeedom presidents. The market however, likely anticipates return metrics that follow the averages.
A Clinton win is viewed by markets as more favorable to Wall Street and a Trump win is more uncertain (as viewed from Wall Street). To be fair, there have been significant ups and downs under various groups. Additionally, looking at the chart above, markets do seem to struggle more after long run-ups than just depending on which type of president we have.
I bring this up just to illustrate that more volatility going into this very unique election is not something that should be surprising. More direction will continue to become evident as we get more “knowns” rather than so many “unknowns.” As I have said before, the markets really do not like uncertainty!
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