May 7, 2016
You’ve Been Trumped
Stock markets retreated again this week seemingly fulfilling the “Sell in May” prophecy. Mixed earnings, weak job growth and continued manufacturing weakness provided the narrative negativity. Additionally, the market has once again collided with a trading threshold it hasn’t been able to cross for more than a year. Over the past 12+ months, each time the S&P 500 approaches the 2100 level, it recoils. The last attempt which started close to 1800 in February carried high hopes and momentum with it only to again meet resistance at 2100. Unfortunately, the slow global economy and the decline in earnings makes it mathematically challenging for the market to ascend with market-wide valuations rich. That doesn’t preclude the market from looking beyond the soft patch into the rosier earnings garden projected into 2017. A swell of optimism would certainly improve this markets chances of clearing the invisible wall. However, between now and election-day this market could be Trumped.
Going back to 1900 the S&P 500 has fallen 1.2% on average over the last year of an 8 year presidential term (see this week’s first graphic). The combination of a lame duck administration with new boss uncertainty inspires “wait and see” behaviors from investors. In fact, even though the market has rallied strongly off of the February lows only 22% of individual investors describe themselves as bullish. While I cannot quantify the correlation between the level of political noise and the level of household exasperation, I’m guessing it’s pretty high. I have not been around since 1900, but I cannot remember an election this contentious or a policy divide this wide. In truth, the market doesn’t side with political parties as much as the level of certainty. Trump ranks pretty low on predictability (understatement), while Clinton has been operating politically in the public eye for decades. For that reason, the market appears to prefer a Clinton III presidency as evidenced by this week’s second chart. Throughout the year, as Clinton’s odds have risen, the stock market has risen as well. This past week, with Trump’s odds improving after Cruz and Kasich’s withdrawal, markets sold off suspiciously. If the market sees Trump as the lead uncertainty candidate and Clinton as the lead certainty candidate the ebb and flow in the polls will likely a larger than usual impact on the market. Welcome to year eight…with an exponent.
Bottom Line: The S&P 500 has once again crashed into the 2100 wall. Rising above this level will require investor faith and optimism over brightening prospects for earnings and the economy. Unfortunately, investor attention has been hijacked by the Trump/Clinton slam-fest. The market has branded Trump the candidate of uncertainty and Clinton the candidate of certainty. As such, favorable Clinton polls have correlated more closely with favorable market trends. Trump’s rapid advance in the last week has coincidently shaved 2% over the S&P. Market activity can never be easily explained, but by isolating this one variable it appears that the market is casting its vote for Clintonian certainty, even if it fundamentally disagrees with Clintonian policy proclamations. Expect market volatility to reflect polling volatility until November.
Happy Mother's Day!!
David S. Waddell
CEO, Chief Investment Strategist
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