"Kee" Points with Jim Kee, PhD.

Looking around the world, markets seem to be pretty consistent with expectations. Using the MSCI World as a base or global average (4% price returns year-to-date), European, UK, and Japanese stocks are performing below this global average while US and Chinese stocks are performing above it. UK stocks obviously reflect uncertainty regarding the Brexit vote aftermath, while European stocks reflect Brexit and other things, such as unresolved financial issues, refugee problems, and uncertainty caused by the rise of fringe political parties (Financial Times). China’s stock market hardly reflects the economy there, with retail investors facing distorted investment choices comprising of about 80% of that contrived market. This is in sharp contrast to Western markets dominated by professional/institutional investors (Asian Times). So stocks are up in China while the Chinese economy continues to struggle. In fact (I know I’ve mentioned this before), I think Chinese growth concerns will be back on the press’s front burner by years’ end. In Japan, stocks have also underperformed the global benchmark year-to-date, leading the Bank of Japan to target zero percent 10-year yields (more on that perhaps next week) in order to help that stagnant economy. Finally, in the US, I would say markets are behaving in fairly typical election-year fashion so far, and I wanted to elaborate on that in today’s Kee Points. This seems like a particularly good time to do so, with the high drama of tonight’s debate between Hillary Clinton and Donald Trump expected to receive record-setting viewership. I assume this is mostly for entertainment, as I am aware of no real evidence that presidential debates shift voter opinion. In fact, Gallup polls going back decades show the opposite (The Washington Post).


Last week at the Tobin Center, South Texas Money Management partnered with some local professional services firms (i.e. accounting/legal) to address issues in play regarding the upcoming presidential election. STMM handled the investing part, with Jeanie Wyatt moderating a panel discussion. We first polled the audience regarding election-related investing trivia, then we went into some facts. This seemed like it could be enjoyable for Kee Points readers so I thought I’d share the results below:


POLLING QUESTIONS AND ANSWERS:


Who do you think will win the 2016 Presidential election? 57% thought Hillary Clinton would win, 43% thought Trump would win. That’s pretty close to today’s Pollyvote, by the way! (52.3% Clinton/47.7% Trump).


Who will control Congress? 88% felt that Republicans would retain control of Congress.


How many electoral votes are there, and how many do you need to win? The correct answer was 538/270, and 89% of respondents got that right.


Which US President had the strongest stock market during his first year of Presidency? 69% thought it was Ronald Reagan, but it was really Franklin Roosevelt, who was elected President four times (by the way!)


Which US President had the second strongest stock market during the first year of Presidency? Most got this one, which was Barack Obama.


Which President had the strongest stock market throughout his presidency? Again, most thought it was Ronald Reagan, but it was actually Calvin Coolidge (Reagan was close, however).


What is the largest source of revenue for the federal government? Most (69%) got this correct, it is individual income taxes, followed by payroll taxes, and then corporate income taxes. Combined that’s about 90% of the federal government’s revenue.


ELECTION/INVESTING FACTS:


Going back 22 elections to 1928, the market (S&P 500) has correctly predicted the presidential election 88 percent of the time, where “correctly predicted” means that when the market is up three months prior to the election the incumbent party wins, and when the market is down three months prior to the election the incumbent party loses (Bloomberg; Strategas). So far the market is down about 2.5% going into that three month period, which would suggest a Republican win by that logic (but I’ll stick with Pollyvote).


Electoral Votes: Only 10 states are “in play,” in the sense that they have changed from one party to another in at least one of the last 4 elections. They are: Nevada, Colorado, New Mexico, Iowa, Indiana, Ohio, North Carolina, New Hampshire, Florida, and Virginia (Pollyvote).


Stock market performance during election years tends to be a little below average, and for the year after as well, but almost insignificantly so. Of the 88 years of investment returns, stocks have generated positive total returns in 64 years and negative returns in 24 years. Bonds generated positive total returns in 72 years and negative returns in 16 years. How many years were negative for both stocks and bonds? Only three out of 88! So a balanced portfolio of stocks and bonds was in fact pretty darn stable. For example, compare that with gold, which has had at least 5 declines of 10 percent or more just since the Great Recession. Not to pick on gold, but from its peak in 2007 to its trough at the end of last year, gold had lost 42 percent of its value, so the idea that gold is a stable store of value is patently false. At one point during the 2007-09 crisis gold had declined over 48% peak-to-trough, so the idea that gold is always a safe asset in times of severe crisis is also false. Gold can play a role in investing from time to time, but it is important to have a fact-based rather than a story-based view of gold.


It is true that stocks do better in election years when Republicans win (15.51% average) than when Democrats win (7.29%), but the markets basically flip-flop the following year, with low returns for Republicans (basically flat) and strong returns (15%+) for Democrats. Stocks have also done better in total (taking all years into account) under Democrat regimes (13% per year) than under Republican regimes (7%), but they also tend to do above average when Republicans control Congress, regardless of which party is in the White House (Crandall Pierce).


The key conclusion, one that is supported by inferential statistical analysis (rather than just descriptive statistics, which I have just given), is that the statistical relationship between elections and returns is almost zero. There just aren’t enough data points, and the exceptions are too numerous to make meaningful conjectures. That was the point of my run through the facts; namely, that there is nothing in the analysis of stock and bond market returns and elections that would merit a deviation from a well thought out long-term investment plan.