Politics and Stocks

In this murky soup of American politics, we try to place blame on one politician or another for his or her influence over policies that may or may not directly affect the enormous capitalist economy that we have. People often ask, “Is it better for the stock market when there is a Democratic President/Congress or a Republican one?

According to Crandall, Pierce & Co., the Dow Jones Industrial Average had the following results. This is for the 1945-2009 time period.

Circumstance Average DJIA Annual Return
   
Who is the President?  
Democratic President    9.43%
Republican President    6.81%
   
What happens when parties line-up for President and Congress?  
Democratic President, Senate & House 7.43%
Republican President, Senate & House 14.06%
   
What is the best historical scenario for the stock market?   
Democratic President and Republican Senate & House 14.67%
   
*Since 1945 there has not been a line up of the current situation: Democratic President, Democratic Senate and Republican House.  

Notably, all returns are positive, pointing to the fact that on average annual stock returns are positive regardless of politics. The dispersion of returns is large enough however that knowing the average return does not give you much insight into what stock returns will be in any given year. Since you can’t really use this information to your benefit, it is best to keep a long-term perspective with a well-diversified portfolio.

It is my opinion that so many factors affect the stock market that this is no true indicator of stock market performance. The market is affected by past policy and present decisions, as well as investor expectations. It is affected by a global economy and enormous world-wide demographics. Nevertheless, we do get asked the question fairly often, so here are the statistics – but you may want to take them with a grain of salt.

Harli L. Palme, CFP®

Financial Advisor

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Positive Thoughts on the Stock Market

Eighteen months ago, in early March of 2009, the stock market reached its low point with the S&P 500 at 667.  Currently it is 1,045, + 57%.  Then the economy was sinking; now it’s growing.  Jobs were being lost, now they are being created.  Inflation is very low.  Interest rates are at an all time low.  Corporate profits are rising rapidly; corporate cash accumulation exceeds $1.8 trillion!

Why is everyone so worried?  Higher taxes coming on a weak economy?  Maybe, maybe not.  They have been much higher before.  Weak housing?  With 4,000,000 young Americans turning 30 each year, how long does anyone really think new housing starts will stay below 500,000 with 4.5% mortgage rates available?  Low job creation?  Expectations are for 1,000,000 – 1,500,000 more jobs this year and more than that next year.  True, 1,200,000 more only holds the unemployment rate level, but at least jobs are being created!

Everyone worries about a surprise decline, and there is always some new worry that could send it down.  Avian flu?  Worried about that pandemic now?  Probably not.  Greece? Worried about that now?  Probably not.  China’s growth rate could decline from 10% to 9%.   Is that really something to worry about?  The Taliban.  Criminal thugs.  From 1910 – 1950 the world suffered WWI with 40,000,000 deaths and then WWII with 60,000,000.  Allied deaths in the Iraq and Afghanistan Wars are very low in comparison, numbering less than 10,000.  Of course we all wish it was -0-; my son Eric is a 2nd lieutenant in the Army and will probably be in Afghanistan next year.   Sadly, there will be more wars and incursions to come.  Thankfully, for the first time in world history there is no super power confrontation.  Britain, France, Germany, Russia, China, Japan and the USA are all pretty friendly and economically cooperative! Each has too much to lose by going to war with another.

Instead of a surprise decline, how about a surprise and massive advance?  It happened 18 months ago, now + 57% from that level.  Estimates for earnings on the S&P 500 for 2011 are $93.  That puts the Price Earnings Ratio (P/E) at 11.2.  The average over the last 100 years is 15-16, with a low of 10 and a high of 20.  When do we get a 20 P/E?  When inflation is low, interest rates are low, and corporate profits and the economy are growing.  Check, check, check and check.  The overall level of GDP will likely be at an all time high in the first quarter of 2011. 

The 3rd year of the Presidential cycle has historically been the best year of the four year cycle, and has been positive every time all the way back to 1939, averaging + 21.6%.  For the 30 years from 1926 – 1955, including the Great Depression, WWII and the Korean War, the compounded annual return on large stocks was + 10.2%, on small stocks was +10%.  Over the last 30 years, even with the terrible 2000 – 2009 decade, annual compounded returns on large stocks were +11.2% and +12.3% on small stocks.  You could buy a 30 year Treasury bond today with a 3.65% yield.    But this is likely to be a very poor investment compared to alternatives.

Where will the market be in early March of 2012, 18 months from now?  We’re mindful that it could easily go down before it goes up, but over the full 18 months we at Parsec are going to predict up.  Maybe WAY up.  A 15 P/E on $105 of S&P 500 earnings in 2012 would be 1,575 on the S&P 500, + 51% from here.  Markets fluctuate, but historically over the longer term they go WAY up.  + 51% over the next 18 months?  It may appear unlikely right now, but more than that happened over the last 18 months.  We’ll keep you posted.

Bart Boyer, CFP

Chairman and CEO

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SDG Market Indicator: Future Nobel Prize Winner?

Every day, it seems someone has a new model that claims to predict the next stock market meltdown or boom.  Two of my colleagues, Mark Lewis and Sarah DerGarabedian, and I had a stock market theory we tested a couple of years ago.  We called it the “SDG Market Indicator.”  

At the time, Sarah’s almost one-year-old son was having some difficulties sleeping through the night.  Whenever she did not get a good night’s sleep, we noticed on most of those days the stock market dropped.  Over a 48-day period, we compared her sleep cycle against the market’s performance.  If she slept well the night before, the market increased 42 percent of the time.  The market was either flat or declined 58 percent of the time when she had an average to bad night’s rest.  

You are probably saying to yourself, “This is the stupidest thing I have ever heard.”  You are right.  Some people accept far-fetched theories like the SDG Market Indicator as sound market guidance, though.  As they chase the next theory’s prediction, they risk losing more than they could potentially gain.  

Market timing statistically does not work.  A study by Morningstar highlights the dangers of market timing.  This study shows that, during the period 1926 – 2009, an investor who invested $1 in stocks would now have $2,592.  The study also shows that if that investor missed the 37 best months during this time frame, but was otherwise invested in stocks, the investment would only be worth $19.66 at the end of 2009. 

At Parsec, we prefer to take the long-term view when evaluating the market.  It is impossible to predict on a day-to-day basis what the market will do.  However, as studies have shown, the market will eventually recover from declines.  It is all part of the cyclical nature of financial markets.  

The next time you see a hot new theory, just think of the SDG Market Indicator.  Now, I am off to force feed Sarah a turkey sandwich and slip an Ambien in her tea.  It is time for a few positive days in the market.

Cristy Freeman, AAMS
Senior Operations Associate

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Home Sales

A report by The National Association of Realtors shows that on the national level existing home sales dropped -5.1% in the month of June, though sales are up +9.8% since last year.  The sale price of homes increased +5.2% from last month, but just +1% from last year.  With inventory up to 8.9 months of supply, there is a lot of downward pressure on home prices.

Here in the sweet, sunny South, the level of home sales is more improved that the Western states, but less so than our Northern-Eastern neighbors.  According to the National Association of Realtors seasonally-adjusted existing home sales in the South are down -6.5% from last month, but are up +11% from this time last year.  Sale prices on homes in the South are up +6.4% in June, but flat from this time last year.

I read this as being hugely influenced by the home-buyer credit.  No doubt there was a rush to buy prior to April 30, which is the deadline for having a binding contract.  (The deadline for closing on these sales was June 30, but then was extended).  Despite this volatility in monthly data, home sales are up for the year.  The question remains how much the home-buyer credit spurred buyers to come into the market that wouldn’t have otherwise, or whether the credit just encouraged those that planned to buy regardless, to do so in the first part of the year.

Harli L. Palme, CFP®

Financial Advisor

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Financial Industry Reform

The banking overhaul bill has passed!  To quote the Kiplinger Letter, “The regulatory revamping cuts a wide swath, giving broad power to Uncle Sam to protect consumers and discourage banks from engaging in risky behavior.”  The main goal of the law is to prevent a crisis like the one experienced in 2008.  Let’s hope the law will act as a warning system when greed and fear creep into decisions being made by financial institutions.  One of the key components is that the Fed now has the authority to seize big financial firms and banks before panic sets in.  The largest of banks will increase their reserves so that they are less likely to crash in economic down turns.  Harry Reid was quoted saying, “Now no bank is too big to fail.”  However, there will always be financial giants that would cause disaster in world markets if they failed.  The new higher capital requirements of the big banks will make lending standards more demanding, which will have a slight drag on the recovering economy.  GDP is expected to be 3-3.5% in 2010.  The big banks will also be required to hold 5% of the loans they underwrite in their own portfolio.  Smaller banks have less capital requirements then big banks, but they could be affected by the reduction in certain fees that can be charged to consumers.  The bill does permanently increase the FDIC insurance to $250,000 per account.  The SEC also gains authority to force corporations to let shareholders nominate candidates for boards.  The bill was not intended to provide investor protection.  However, increased transparency and disclosure by financial firms that could help prevent a meltdown will be good news to investors.

Gregory D. James, CFP®

Partner

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Recovery Phase is Over? Now What?

There is plenty to be worried about these days. Outside of Europe, Iran, China and taxes, it appears we are now faced with a slowing economy. Over the past few weeks, we have seen economic and earnings data disappoint versus expectations. Although it appears that the economy is slowing, it can be beneficial to understand the economic cycle to better understand what is truly happening.

The typical economic cycle lasts between 5-7 years. The textbook definition of a business cycle includes four stages: Expansion, Prosperity, Contraction and Recession. Although I may not be textbook in my thinking, I like to divide economic cycles into 7 stages: Peak, Contraction (or Recession), Trough, Recovery, Expansion, Euphoria (then Peak again).

During the Recovery phase, we typically see companies experience significant growth, not because the economy is completely healed, but rather because the growth is being compared to extreme lows (the Trough). Although this growth is welcomed by both individuals and the market, it is typically unsustainable. For example, for the last several quarters we have seen many large cap companies grow earnings by 25 – 50%. During a Recovery, the majority of this growth is achieved by extreme cost cutting and margin expansion combined with a moderate amount of revenue growth.

As the economy begins to heal, we begin to transition to the Expansion phase of an economic cycle. Although less exciting, this is typically the longest phase of an economic cycle. During this period we typically experience earnings growth, but at a slower pace. This is the phase we believe the market is now entering.

Quite often, the transition from Recovery to Expansion is met with much pessimistic volatility. While this transition is taking place, investors still have vivid memories of the past contraction. As the recovery slows, skeptics are able to pinpoint leading indicators that are showing signs of weakness. These factors help to create the “Wall of Worry” that the markets so typically climb.

The good news for our clients is that high-quality, dividend paying stocks will often outperform during an expansionary phase. This occurrence is typically due to earnings growth, dividend yield and rising interest rates, which can harm the weaker, over-leveraged companies. It is also common for high-quality fixed income to underperform during the expansionary period, again due to rising interest rates.

Although the negatives continue to grow by the day, we continue to believe the “double dip” is unlikely. We feel the positive sloping yield curve, absence of inflation, pristine corporate balance sheets and strong corporate earnings growth will provide for a normal, albeit bumpy, transition from Recovery to Expansion.

Michael Ziemer, CFP®
Partner

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The Case-Shiller Index

Earlier this year, I received an email from my alma mater saying that Karl “Chip” Case was retiring after 30-plus years of teaching economics at Wellesley. Although I never took one of his classes (which I now regret), I know that he was immensely popular and beloved by his students, and will be greatly missed. One of his enduring legacies is the Case-Shiller Index (technically called the S&P/Case-Shiller Home Price Indices), which he developed with Yale economist Robert Shiller and Shiller’s graduate student Allan Weiss.

The indices are calculated based on repeat sales of single-family homes. Measuring housing prices based on median sales shows the values of different homes selling at a particular point in time, rather than tracking the sales price of the same house over time, which Case believed was a more accurate way of measuring appreciation in housing values.

The indices (now generated and published under an agreement between S&P and Fiserv) are published on the last Tuesday of the month, and have become a media staple during the downturn. The most recent report, published May 25 for data through March 2010, showed that the US National Home Price Index fell 3.2%, but is above the year-ago level. Average home prices are now at levels similar to those in the spring of 2003. Eighteen of the twenty metro areas represented in the 20-city composite showed improvements in annual returns, with the exceptions being Atlanta and Charlotte. Las Vegas was the only city to still post a double-digit decline at the end of March.

Sarah DerGarabedian
Research and Trading Associate

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The Market

Obviously, we are going through a difficult time – again – in the market and investors fear there will be another drop similar to the last one. I read the following in an AP article on the web this morning: “Don’t panic. Think long-term. Corrections are normal.”

The idea to get out of the market when it starts to go down and get back in when it goes up just does not work. The reason it doesn’t work is that despite all the predictions you read and hear out there, no one knows when the market hits the bottom or when it will turn around. Long term investors should not be concerned about short term volatility. You should always keep enough cash for emergencies and have the proper allocation for your situation. You need a long-term plan and you also need to resist the temptation to succumb to the fear that the media generates.

I received a newsletter this week where the title concerned another bubble that is about to explode. They predict that the average $100,000 portfolio will be worth $48,000 at the end. However, if you would only take the bold steps outlined in the report you could turn that $100,000 into $2.4 million. The report is 20 pages long and outlines some compelling evidence and I can see why people would be influenced by reports such as this. If it was so easy to make so much money why is the author writing a newsletter? There are also books – that are best sellers – that are predicting dire things for the economy. There are also books that give a more balanced historical perspective, such as “Manias, Panics, and Crashes” (fifth edition) by Charles Kindleberger and Robert Aliber. While we usually hear “this time is different” the truth is that every time is different, yet surprisingly the same.

Barbara Gray, CFP®
Partner

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How to Save Millions in Two Seconds!

I love headlines like that. Tightening our belts is the topic du jour during this economic disaster. While the leading indicators show an improvement, I am sure you know people who are still unemployed, have lost their homes, or are in serious financial straits. We are hardly out of the woods yet. So, I have compiled a list of my favorite tips for saving money:

Protect your credit score. Why?

o You qualify for better interest rates when your credit score is good, which saves you money in the long run.
o Your credit score impacts your property insurance rates.
o A prospective employer may want to check your credit. A bad score could hurt your chances, depending upon the employer.

Everyone knows you should get the free, annual credit report offered through AnnualCreditReport.com. Identity theft is not the only danger, though. Excessive debt and late payments or defaults can damage your score. All your sacrifices and stringent budgeting can be undone by a lousy credit score.

Be thoughtful about all purchases, not just the big ones. I am not talking about your daily Starbucks habit, although that can add up too. A lot of purchases are driven by a perceived need, rather than an actual need.

Don’t fall victim to the “it’s on sale” syndrome. You are not saving money if you really had no intention of buying the item in the first place.

The Internet is a fabulous tool. You can comparison shop without having to leave the comfort of your home.

Tip if you are considering an appliance purchase: Go to energystar.gov. Look for the Energy Star Appliance Rebate Program button. The “cash for clunkers” program is being offered for certain appliances this year. Each state has a different budget and rollout date. Our dishwasher died here at Parsec about three weeks ago. We waited for this program to start in North Carolina and saved over $100.

Ask about discounts. Some people will give you a discount, but you have to ask. My vet will match heartworm medicine prices offered by a national catalog retailer. I saved about $50.

Yes, it takes extra work to stretch your dollar these days. Hopefully, these tips can assist you in that task.

Cristy Freeman, AAMS
Senior Operations Associate

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Do December Job Losses Mean “Double Dip”?

This morning we received a disappointing jobs report from the Department of Labor indicating that U.S. employers cut 85,000 jobs during the month of December. Since the consensus of analysts was expecting a loss of only 10,000 jobs, one can only wonder if this disappointing news means the end of positive jobs data.

As we move into this economic recovery we must remember that one piece of data does not a trend make. In fact, we have seen most indicators (leading, coincidental and lagging) improve over the last 6-9 months. When reviewing economic data, it is very difficult to make any conclusion from a single piece of data. Instead, it can be more important to follow the trend of data to get a sense of whether the economy is improving or weakening. During 2009, monthly job losses moderated substantially. Employment losses in the first quarter of 2009 averaged 691,000 per month, compared with an average loss of 69,000 per month in the fourth quarter. In following the recent trend, it is clear that the economy is strengthening.

We must remember that it is the job of the news people to shock us in order to ensure that we “tune in” tomorrow. Buried in today’s headlines, we learned that the US Labor market actually added 4,000 jobs in November rather than losing 11,000 as initially reported. This marked the first job growth in two years. This is excellent news that, along with the current trend, should indicate job growth for quarters to come.

In the early 1980’s we experienced what some call a “double dip” recession. This double dip recession was actually two recessions (Jan. 1980-July 1980 & July 1981-November 1982) separated by a period of rapid economic growth. In fact, the economy recovered so strongly from the 1980 recession that inflation forced the Fed Reserve to increase interest rates to a point that forced the economy into the second recession of 1981-1982. Let’s not forget that the economic period after the recession of 1981-1982 was arguably the strongest period of sustained economic growth in history.

This lesson in history teaches us that a slow and steady recovery may be more sustainable than a quick, inflation driven recovery. Although the trend to economic growth remains intact, the reasonable rate of change may allow the Fed to remain accommodative. This freedom could allow the Fed to raise rates when it feels the economy is stable enough to handle a tighter money supply.

Each and every one of us has either been directly affected or had a friend or family member who has been affected by the worst recession since the 1930’s. Their pain and suffering make us wish for a sharp economic recovery and strong job growth. However, we must not forget that before you can run you must first learn to walk. As long as the trends remain positive we will be running in no time.

Michael J. Ziemer
Partner

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