The history of the stock market returns mapped against the control of the three most important houses in Washington DC is evident. When Republicans control the White House, the Senate, and the House of Representatives, the stock market sees its worst overall performance. It is only slightly less dismal when the Democrats control all three houses.
Conversely, the best stock market returns occur when one party controls the White House while the other controls both houses of Congress. The lesson is that absolute control by one ideology does not bode well for business, while divided government seems to work, at least economically.
By this metric, one could argue that the economy is in for a rough few years with the advent of Donald Trump and the Republicans retaining control of both houses of Congress. Investors seem to disagree with this opinion, probably because of the promised, more favorable business climate.
The post-election stock market rally puts the market at all-time highs, while the overall risk in the market is at unusually low levels. The S&P 500 closed the night of the election at 2,140, while in mid-May it hovers around 2,400, a 12% gain in just half a year, and only a few months into the new administration. On the volatility side, the number of days the index moves either direction by more than 1% since 1950 is about one in five days. Since the election, it only happened about once every twenty days, and 80% of those moves were to the upside.
Consumers also seem to believe that their situation is improving. Consumer confidence, an important leading indicator of potential economic activity, riding high since 2015, improved dramatically with Trump’s victory.i
Consumer activity accounts for over two-thirds of our Gross Domestic Product (GDP), the most common measure of our economic health. Confident consumers tend to spend more than fearful consumers, and increased spending is good for the economy.
Corporate earnings also belie impending doom. With almost all S&P 500 company’s earnings reported, the average revenue growth is over 7% while earnings per share growth exceed 15%. These are solid earnings numbers. Companies are making money, and that is good for the economy, too.
According to LPL Financial Research’s Recession Watch Dashboard, there is “…an overall low risk of recession starting within the next year.” While the expansion continues to mature, the excesses as measured by LPL’s “Over Indexes” of overspending, overborrowing and overconfidence that lead to the three previous recessions are all well below half of their danger zone readings. Of the “Five Forecasters,” only “Market Valuation” bears watch-list status.
With this much confidence in the biggest part of the economy, what could go wrong?
Recessions and the Bear Markets which often precede them are rarely seen coming with clarity. It is after they have arrived and taken hold that we can see the telltale warning signs. However, the markets often get it right, beginning a slide about six months before the official start date of the recession.
Invariably, something totally unexpected spooks the markets, which panics investors, and gives the media a hot story, causing consumers to question their purchase impulses and slow the economy. In today’s world, it could be something as stupid as an ill-considered tweet gone viral, but most of us are growing numb to @POTUS tweets. It could be something malevolent, like ISIS. Most probably, however, it will stem from avarice, as someone uncorks a new way to game the system.
When markets are at all-time highs, taking some risk off the table might be prudent. But in the face of rising interest rates, finding a good place to park those proceeds might be difficult. Contact us to discuss the alternatives which might help better position your portfolio to pursue your long-run financial goals.
i OECD (2017), Consumer confidence index (CCI) (indicator). doi: 10.1787/46434d78-en (Accessed on 22 May 2017)
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