Where I grew up in mid-Michigan, there was a local Chevy commercial that had a jingle that went “Baseball, hot dogs, Applegate and Chevrolet.” This week the news cycle, at least here in Chicago, has been focused on baseball and the “lovable losers”—the Chicago Cubs—breaking 108 years of curses to win the World Series. For investors, however, politics—specifically next week’s presidential election—has been chipping away at portfolio balances the last couple of weeks. The current market environment has been anything but apple pie.
A couple of weeks ago, most analysts agreed that the stock market had priced in a Hillary Clinton victory on November 8. However, in recent days, polls have tightened and uncertainty as to the outcome has risen. Also contributing to weakness in the market has been falling oil prices. Since the market hates uncertainty, it is perhaps no surprise that there has been a sell-off. The S&P 500 has fallen on every trading day since October 25, bringing the streak to nine straight trading days, including today. Over that period, the index has lost 3.2%. According to FT.com, this is the longest losing streak since December 1980. Furthermore, of the 12 losing streaks of at least nine trading days since 1928, the current one has the second-smallest decline over the losing period. Coinciding with the decline in stocks has been a rise in market volatility. The CBOE Volatility Index (VIX), which measures investors’ expectations for stock movements in the next 30 days, has risen for nine days in a row, jumping 74.5% from 13.02 on October 24 to 22.72 as of today’s close. According to The Wall Street Journal, this is the highest level since the immediate aftermath of the U.K.’s Brexit vote in late June.
As Election Day draws near, we are seeing research reports coming out with post-election predictions. On Friday, Citi released a report predicting an immediate stock sell-off of as much as 5% should Donald Trump win the election and warned of a slowing in the U.S. economy or even a recession, assuming trade is restricted and fiscal expansion plans are curtailed. According to CNBC, the investment bank ran a survey in September that showed that Wall Street strongly believed that Clinton would win the election. Sentiment has been shifting, however, in the face of the ongoing FBI probe into the candidate’s emails.
However, in a New York Times article this week, Lawrence G. McDonald of ACG Analytics suggested a silver lining to a Trump victory. In the article, McDonald stated that “Trump will create a colossal panic, but the relief rally will be outstanding.”
If you believe in the stock market as a predictor of election outcomes, history is in Donald Trump’s favor. The S&P 500 fell 1.9% in price in the third quarter and lost 1.8% on a total return basis. According to CFRA, since 1944, whenever the S&P 500 fell during the three-month period ended October 31 leading up to the presidential election, the incumbent person or party was replaced 86% of the time, with the sole exception being 1956. One significant caveat, however, is the small sample size.
While institutions have been revising their outlook, how about individual investors? This week, as part of AAII’s weekly question, we posed this special question: Will the outcome of the U.S. presidential election change your outlook on the stock market? As of Friday morning, the results were almost evenly split.
While the stock market will react to news and uncertainty in the short term, investors need to have a long-term outlook. No matter who is president, laws still have to be run through Congress, and the Supreme Court ultimately decides their constitutionality. Perhaps a more important aspect of next week’s election is the House and Senate races that will determine which party controls Congress. According to FiveThirtyEight.com, as of Friday morning, they were predicting a 67.8% chance of a Democratic majority in the Senate.
In order to regain the House of Representatives, Democrats would need to win 30 seats. Ballotpedia’s tracking of House races projects that Democrats should win 184 seats, while Republicans can probably count on 228 seats to be reliably in their corner. Even if the Democrats won all of the remaining 23 “competitive” seats, they would be seven seats shy of a majority. So, no matter who wins the White House next Tuesday, the likelihood of congressional gridlock remains.
No matter who you’re supporting, be sure to exercise your civic duty and vote this Tuesday!
Earnings Season Update
Through the close of this week, 28 of the 36 SSR holdings have reported their quarterly results for the current earnings season. Twenty-one have reported earnings above their consensus estimate, two have reported in line with estimates and five have reported a negative earnings surprise. The median earnings surprise for these 28 companies is +4.4%. See the news section below for information on the seven SSR companies that announced earnings this week.
Wayne A. Thorp, CFA
Senior Financial Analyst, AAII
SSR Investment Committee
Click here for news on the current SSR holdings and weekly performance data.
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