Money Matters Newsletter:
December 1, 2015
Election Year Trends for Stocks
The Investment View from Prescott, Arizona
Presidential election cycles have a pronounced effect on the stock markets as new presidents proclaim things are much worse than they thought while running, introduce draconian measures to fix them, and government economic pump priming reaches its peak prior to the upcoming elections.
We are currently in the 4th year of the presidential term, measured from November election dates. Historically speaking, what does that mean for the stock markets?
Generally, the third year in the presidential cycle is the strongest, and the Nov 4, 2014 through Nov 3, 2015 period was certainly more flat than strong with a gain in the S&P 500** stock Index of only 4.86% for the whole 12 month period. As I’ve commented many times this year, this is not a strong market.
Fourth years in presidential market cycles, the period running from now through the election next November, tend to be the second strongest of the cycle, but also tend to be less so for 2nd term presidents than 1st termers. With this being the incumbent’s second term, that suggests a rather tepid market for the next year.
Markets really don’t care whether a Republican or Democrat gets elected, but financial markets just hate uncertainty. Uncertainty causes cash to not get invested. The only thing that is certain is that we will have a change of some sort next November and that will make the markets nervous. As a result, I’m expecting increasing volatility next year peaking in the September-October time-frame, which already has a reputation for being tough on the market.
A Slice of Life
Retired tax guru and longtime friend of Hepburn Capital, Shari Graham, is opening a fun new used book store in Prescott’s Willow Creek Plaza, a few doors down from Method Coffee in the new Fry’s shopping center. She is in the process of building inventory before opening The Purple Cat in January 2016.
If you have gently used books that you would like to donate, just bring them to our office or give Shari a call (771-2778) to pick them up. Here’s a chance to free up some of your shelf space and do a good turn at the same time.
How Are The Markets Doing?
300 Days of No Gain?
The market is slightly below where it was on December 29th of last year as of this writing on November 29th. That is 334 days with no gains!
This kind of action is not characteristic of a bull (rising) market, but a slow or more controlled decline similar to what happened as we moved into the bear markets of 2000-2003 or 2007-2009. Even if history does not repeat itself exactly, it often rhymes, so astute investors are wise to pay attention to these repeating patterns.
If a picture is worth 1,000 words, then a chart is worth 1,000 numbers. This chart shows what the market has looked like this past 12 months.
Clearly, this is a market that is rolling over. I began writing about this loss of momentum last spring and I am still concerned that this stock market appears to be in decline.
The Vanguard Total Bond Market Fund (Ticker Symbol: VBMFX) has made a whopping .37% gain so far in calendar 2015, including reinvestment of all dividends. A little better than bank rates, but . . .
Commercial traders are called the “smart” money because they don’t get billions to invest by being stupid. Although gold continues in its bear market, shedding another 9% this year, its 4th straight year of losses, important commodities do not go down forever (or up forever, either). The bullish activity of commercial gold traders suggests that the bear market in gold may be ending.
Energy prices remain depressed with oil hovering around $40 a barrel. Oil for $40 might make you feel good when you fill up with $2 gasoline, but these low prices will begin to cause business failures and debt defaults in energy companies that borrowed expecting $100 oil to be the new normal. Business failures put workers out of jobs, and create debt defaults which are sort of like a cold; one borrower sneezes and others catch it too. However, a domino effect of debt default is nothing to sneeze at.
Other fallout from lingering low oil prices may be the decay of the clean energy industry now that oil and gas are so much cheaper than solar. At $100 oil, solar performed well compared to oil. At $40 oil, solar is not all that attractive, economically.
Foreign markets including Europe, Japan and emerging markets all peaked last spring and have experienced significant declines since then. Europe and Japan are in recessions, and although you can’t believe many numbers coming out of China, I suspect they are in recession too with their stock market shedding 25% of its value since April. If you need more convincing about how bad things are in China, consider the Reuters story about how drink makers Hennessy, Remy Cointreau and Pernod Ricard are suffering as sales of high-end cognacs slip dramatically in China. When the rich cut back, the economy is not good!
Dividend oriented Real Estate Investment Trusts and high dividend stocks have also been declining most of 2015.
High-yield (junk) bonds are one of the best leading indicators for the stock market. Junk has been headed down for more than a year even while the stock market has held up fairly well. In past periods when high-yield bonds went down and the stock market went up, such as 2000 and 2007, it was high-yield bonds that were proven right when deep bear markets followed.
The excesses of the Fed’s stimulus programs that ended last year may have postponed the day of reckoning, but poor performance by junk bonds points to a lack of cash in the economy, and it takes cash, plus the willingness to invest it, to make the market go up. A lack of either one can take a market down.
Hepburn Capital Shock Absorber Growth* accounts are all holding a lot of cash due to the high risk and low reward type of market we are in.
With so few market segments posting decent returns this year, investment money seeking short term returns has flowed increasingly into leading sectors such as biotech and Pharmaceuticals. This is called “hot money” that moves around to whatever is working at the time. The problem with this type of investing showed this summer when both of these sectors experienced 30% declines in just a couple of months as hot money fled to greener pastures.
As the only major stock market that has not been in decline this year, the US stock market is the hot money marketplace of the world in 2015. I haven’t seen this written about anywhere else, but as world investors move money here to avoid falling markets elsewhere, we become more vulnerable to price shocks as hot money suddenly leaves for the next hot market.
As legendary trader Jesse Livermore once said, “There is a time to go long, and a time to go short, and a time to go fishing,” meaning patient investors are often the most successful investors. This appears to be a time to sit back and relax, not be jumping into investments.
What’s Going On In Your Portfolio?
Flexible Income* portfolios gained a fraction of a percent in the 4th quarter as of this writing on November 29th, despite its largest holding, the government bond strategy being in cash most of the quarter. The Vanguard Total Market Bond Index, representative of the entire bond market, lost over ½ percent during that same time, so compared to what else there is to invest in we are doing well.
Shock Absorber Growth* accounts will see a large cash position, along with small inverse fund holdings which will be our shock absorber if the market drops. If the market stays strong, the cash holdings will be gradually put to work. If it weakens, I will add to the inverse positions, allowing us to make money if the decline continues. In a nutshell, don’t spend a lot of time worrying about the stock market. I have a plan in place if it goes up and a plan if it goes down.
We recently picked up small positions in Google, Apple, Facebook and Netflix in growth accounts in advance of tech’s traditionally strongest time of the year, hoping that they will become long term holdings. Another small addition to the portfolio is an exciting new gold strategy that can make money in both up and down gold markets. I’ll talk more about that in upcoming newsletters.
I try to not bug you about matters that you have asked me to take care of for you, but it is important that we occasionally review your circumstances and investment portfolio to ensure that you understand what I am doing for you and you are comfortable with my work. If you would like to see the details on the new gold strategy or review anything else about your portfolio, please call the office to arrange a time to talk, either in person or on the phone. The number is 928-778-4000.
Holiday Open House
Please join us for an open house hosted by CPA Jay of Granite Mountain Accounting on December 10th, from 3:00 to 6:30pm at the HCM office. Come meet Jay and his wife Theresa and join them in ushering in the holiday season. GMA specializes in helping businesses grow and individuals thrive. Jay offers tax planning services and would be pleased to discuss your tax questions. Give him a call at 928-308-2010 and drop by the office for a little pre-Christmas cheer.
Scottsdale Office
If it is more convenient to meet with Will in Scottsdale, please call the office to schedule your appointment. 928-778-4000
Our Spotlight Strategy
With our Future Technologies strategy we strive to provide a high rate of capital appreciation using primarily equity investments in emerging technologies.
We invest primarily in stocks, ETFs and a money market fund. The proprietary HCM Safety Net suite of indicators is used to warn of potential stock market declines in which case exposure may be quickly reduced or hedged using inverse funds or ETFs.
Click here to read more about Future Technologies.
What the Zombie Apocalypse
Means for Your Money
Bob Prechter is the leading expert on Elliott Wave Analysis, a price pattern recognition technique for stock prices. This was pioneered by CPA Robert Elliott in the 1920-30’s. Prechter writes frequently about how social moods are responsible for the cyclical waves the stock market traces out. I subscribed to Prechter’s newsletter for many years and found his insights on social moods fascinating.
Prechter says it is the mood of society that drives the markets either up or down, while most pundits say it is the other way around, the market creates the social mood.
One example Prechter gave years back was about the prevalence of horror movies in the depression years of the 1930’s being a reflection of the dire social mood. Until the horror movies slack off, the mood won’t improve and investing won’t improve.
Classics like Frankenstein, Dracula, The Mummy and Creature from the Black Lagoon all were from that era, and their production of that genre dropped off dramatically as we approached the boom years of the 1940-60’s.
After that 30 year lull in the number of horror flicks, the 1970’s saw another boom in this genre when we had The Texas Chainsaw Massacre, The Exorcist, Freddy Kreuger’s Nightmare on Elm Street, Clockwork Orange and the Friday the 13th series.
Recently I was thinking about the rash of horror films and TV shows that currently seem to be everywhere such as Night of the Living Dead, the Twilight vampire series, The Walking Dead and Zombie Apocalypse – just to name a few.
This flood of horror flicks seems to be a reflection of a poor social mood similar to what we saw in the 1930’s and 1970’s, two of the worst economic periods of the past century. If people invest less during poor social moods, this suggests we are not yet ready to enjoy a strong stock market, reminiscent of the 1990’s.
If we are still stuck in a period of poor social mood after the government printed and spent many trillions of dollars to buoy up the economy, we might be in bigger economic trouble than anyone realizes.
Gulp. Is that a boogeyman or just the guy from the government who is coming to help?
Mental Floss
I can run but not walk. Wherever I go, thought follows close behind. What am I?
Answer:
A nose.
If you would like a current copy of our Privacy Policy or our SEC Form ADV, Part 2, you can find them at our website at www.hepburncapital.com/images/PrivacyPolicy.pdf or www.hepburncapital.com/PR/form-adv.pdf respectively.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Performance and activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** Indexes are unmanaged lists of stocks considered representative of a broad stock market segment. Investors cannot invest directly in an Index.
Flexible Income
Adaptive Balance
Adaptive Growth
Shock Absorber Growth
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.
In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Hepburn Capital Management, LLC adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares and other investments used in our managed accounts are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal. Advisory services offered through Hepburn Capital Management, LLC, an Arizona Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.
Copyright (C) 2015 William T. Hepburn. All rights reserved.
