July 5, 2016
The Election and the Markets
One of the most common questions I get these days is, “what effect the election will have on the stock markets and what we should do about it.” It is hard not to notice all the rhetoric about “their side will ruin us” and worry if some of it might actually be the truth.
The economy and markets are so complex with so many variables that no one has ever figured out what is really going to happen a year or three down the road. What this means is the politicians are just saying what they think will get them elected. They really don’t know for sure, so please take what they say with a grain of salt.
Instead, let’s look at what history tells us about election years and see what insights we can glean about what to expect over the next few months.
My friend, Tom McClellan, writes the McClellan Market Report, and has developed an election cycle chart (below) that shows what has happened in the stock markets during election years in the average second term presidency from 1952 to present. Second terms act differently than first terms, because the stock markets don’t care much which party is in power, but they really don’t like uncertainty, and change is certain when an administration changes.
The chart shows the average second term stock market results projected out through the November election date, compared to our stock market up to a week or so ago.
The data suggest that through August we should expect a sideways choppiness without much gain, followed by a sharp decline into the fall. Although peaks and troughs often do not line up precisely, the rhythm of the markets in most years is similar to the average. This work nailed the pre-Brexit vote stock market peak on June 22nd to the exact day. Kudos to Tom McClellan!
So, as we’ve seen this past week as markets bounced back, life will go on in Great Britain despite the vote to exit the European Union, and I expect life will go on here regardless of who gets elected in the Fall.
For index fund investors, the risk reward relationship is not very good between now and November, but investors who can Adapt to Changing Markets®, like we do at HCM, can do well in any market, including this one.
What the Markets Are doing
It is “window dressing time” in the mutual fund business, because June 30 is the date on which mutual funds must report a detailed list of their holdings. Fund managers want their annual reports to show more of the darlings and fewer of the stinkers that investors have been hearing about, so there is a lot of shuffling of portfolios toward the end of June.
The British EU exit vote (Brexit) shocker only makes the window dressing efforts more frantic as major brokerage houses try to manipulate the indexes back up out of the negative territory they have been in most of the past year so that June 30th performance snapshots don’t further unnerve investors.
Market activity over the next week or two, especially the relationship between the uptrends and downtrends, will more accurately define the state of the markets than the past week has, so stay tuned.
At the end of this year, many market pundits will likely identify Brexit as the cause of the market weakness that I foresee between now and election time. Even if the pre-election sell off becomes a larger bear market, it will not really be Britain’s fault. Brexit is simply a pin that began letting the air out of today’s massive worldwide bond market bubble.
World stock markets are already weak, and therefore very vulnerable to any economic shocks. Big market crashes like we had in 1987, 2001, and 2008 don’t come out of the blue, they happen in already weakened markets.
US Markets are barely slogging along, with the S&P 500 Index** having gained 1.73% over the past 12 months. However the S&P 500** is still below the May 2015 highs, so the trend is really down, not up.
Other markets make the US look like the healthiest patient in the hospital.
“…treat every minor decline with respect, because all major bear markets start off as minor declines.”
|You are reading Will Hepburn’s Money Matters – financial insight from the same professional America’s top magazines turn to.|
Europe (IEV) is down over 11% in the past 12 months, Japan is down 8% and China is down 23% over the same period.
Interest rates continue to drift lower, despite the Federal Reserve’s stated intention to raise them. Higher rates could push a fragile economy into recession and the Fed doesn’t want to risk that.
Gold spiked up due to Brexit uncertainties, but will be entering a cyclical low period which ought to push gold prices back down.
Slice of Life
Mensa Annual Gathering
I am writing this newsletter from San Diego while attending the American Mensa Annual Gathering (their name for a convention). This is always a fun, informative, sometimes quirky, but always stimulating group. I am not doing presentations for them as I have in the past because my schedule was up in the air until a few days ago.
As some of you know, Becca was diagnosed with breast cancer in January, had surgery in March and has been doing chemo since April. The first round of chemo was the stuff of scary stories and she was in bed (or the hospital) some of that time. The current chemo is much more gentle, and although she has to avoid crowds due to white blood cell issues, she is up and around and smiling again. Whew!
The upshot of this is that I was able go to the Gathering knowing that Becca is going to be OK.
We have a lot to be grateful for.
College Classes Coming
Managing an Inheritance: Planning It, Getting It, and Keeping It
July 13th, 3:00 – 5:00 pm.
If you plan to be on either the giving or receiving end of an inheritance from a parent or other loved one, planning is crucial if you hope to preserve the gift, save on taxes and avoid family squabbles.
This two-hour discussion will guide you through the heart of complex issues, both emotional and financial, that families face during the three phases of inheriting: planning an inheritance, receiving it, and making your life better because of it. Topics include: documents you may need, dealing with disability, the use of trusts, basic estate planning principals and protecting your assets. Call Yavapai College at 717-7755 to enroll in course # SU16-113. Tuition is $45.
Don’t Keep Me a Secret
My style of investing, an active management approach, doesn’t have to outperform in rising markets to produce better returns than a buy-and-hold approach, as long as it outperforms in declining markets.
Overall, Hepburn Capital strives to deliver satisfying returns while avoiding life changing losses better than a buy-and-hope-it-works-out style of investing.
If you haven’t noticed, you have a remarkable investment adviser with a truly impressive background working for you: Past President of the National Association of Active Investment Managers, a former mutual fund manager, and a leader in creating innovative investment strategies that Adapt to Changing Markets®.
You can earn discounted management fees with your referrals, so when the subject of money comes up with family or friends, please don’t keep me a secret.
What’s Going on in Your Portfolio?
Last August, to lower the risk we face, I changed the strategies in your accounts to more of a capital preservation mode rather than simply pursuing growth. That turned out to be a good move since the US markets have produced only tiny gains and the global markets have been terrible.
I will maintain this conservative positioning of your investments for a while longer. I give every minor decline a lot of respect, because all major bear markets start off as minor declines.
That does not mean we can’t make money, however. In fact, you have had a good year despite sharp ups and downs in the stock markets.
Not surprisingly, since the stock market has been in a funk, Shock Absorber Growth* accounts, which primarily invest in stocks, were our lowest performing portfolios during the one year period ending June 30, 2016, but still beat the index with a gain of 2.77% after all fees and expenses were deducted.
HCM’s Flexible Income* portfolios simply rocked this past year with a 15.46% gain after all fees and expenses.
Blended portfolios, Adaptive Balance* (currently 40% growth and 60% income) posted a 7.50% gain, and Adaptive Growth* (currently 70% growth and 30% income) netted 6.74% for the period.
Municipal Income* accounts were up 5.85% over the past 12 months.
Plus, all of these returns were generated for you with a fraction of the risk of the Stock Markets.
If anyone ever tells you that active management does not work, that means that they just don’t know how to do it. Send them to me. It can be done, and the results in your accounts prove that.
DID YOU KNOW…
The dot over an i or j is called a tittle?
Our Spotlight Strategy – Flexible Income
With our Flexible Income Strategy we strive to provide high total return consistent with Capital Preservation.
Your money will be invested in bond mutual funds and exchange traded funds (ETFs), including inverse and leveraged funds, currency funds, including precious metals that may be used as currencies and equity-income investments whose price trend is up. If the price cycles down, holdings are replaced with new investments that are going up, repeating as needed. Growth stocks are not used.
Click here to read more about Flexible Income.