Election
Uncertainty and the Stock Market!
Sy Harding, editor
Street Smart Report Online
As
I've pointed out before, statistics show the market doesn't care
who is President, or which party is in control. The market enjoyed
a strong bull run when Ronald Reagan was in the White House.
But it also suffered the 1987 crash on his watch. There was an
okay market during the Bush Administration, but also the 1990
bear market. The S&P 500 gained only 6% over the entire first
two years of the Clinton Administration, but then put on its
biggest 5-year bull run in history. The market doesn't really
care who is President. It dances to its own music.
But it surely dislikes
uncertainty of any kind, and the historical confusion surrounding
this election certainly qualifies as uncertainty.
Yet even under these
types of serious political problems, after the initial knee-jerk
reaction the market has a record of going back to being influenced
by the same economic conditions that normally determine its direction,
and not by the political ambiguity.
For instance, there
have been two periods in recent history when the country faced
even lengthier, and more troubling, uncertainties about the occupancy
of the White House, both of which raised concerns about a constitutional
crisis. The first was the Watergate scandal in the 1970s that
ultimately ended with the threatened impeachment, and actual
resignation, of Richard Nixon. The second was the impeachment
of President Clinton just a couple of years ago.
In the 1970's event,
the stock market began to swoon in 1973 as the seriousness of
the Watergate cover-up began to come to investors' attention,
and continued to decline as the situation worsened, until the
market was in the midst of the 1973-74 bear market, in which
the Dow lost 45%, the second worst market decline of the last
100 years.
Yet, when a similar
situation arose a couple of years ago with the scandals surrounding
President Clinton, after a knee-jerk reaction to the initial
news, the market sailed right along as the situation worsened,
even through his actual impeachment trial, with the Dow hitting
still higher record highs right up to March of this year.
What was the difference?
In the 1970s the economy
was headed into recession. In the 1990s the economy was in the
midst of a powerful boom period. So, the market did not react
differently to similar political uncertainties. It reacted differently
to differing sets of economic conditions that happened to coincide
with the political problems. In other words it acted normally,
responding to the economic outlook and not to the uncertainties
about who might be occupying the White House.
Investors would do
well to keep that in mind in the current situation. Far more
important to the direction of the market after the initial knee-jerk
reaction, will be whether the slowing economy is following the
Fed's plan of slowing to a soft landing, or is slowing too quickly
and threatening a recession. That is the important uncertainty
the market is struggling with right now. Don't worry about the
election uncertainty. It will be resolved in good time.
So, if ongoing election uncertainty cuts too deeply into consumer confidence or the market, threatening to push the economy into a more severe slowdown than the Fed wants, the Fed is now free to announce that they've changed their recent tough stance to a `bias' leaning toward lower interest rates, or could actually cut interest rates, either of which would be a huge tonic for consumers and the markets.
No one is expecting such a decision from their FOMC meeting on Wednesday. The market's reaction to the election uncertainty hasn't been that severe yet. But keep in mind how quickly the Fed acted in the fall of 1998, with two rapid rate cuts that ended the 1998 market correction, and set the market off into a super rally that lasted until the following May. That action came as a total surprise, as the Fed had expressed a desire to slow the economy even back then, and wanted to take some of the air out of the stock market.
Their explanation was that the Russian market and economy had collapsed and it looked like the Asian economic problems of 1997 might return, and they weren't sure the U.S. economy could withstand a U.S. market decline and international economic problems at the same time.
So, don't be surprised, should the stock market continue to decline on the election uncertainty, if the Fed jumps in to cut rates, with the explanation that they're not sure the U.S. economy can withstand uncertainty in the political arena, and a stock market decline at the same time.
Editor's Note: Sy Harding is president of Asset Management Research Corp., 169 Daniel Webster Hwy., Meredith, NH 03253, publisher of The Street Smart Report, 1 year, 17 issues, $225 (now in its 13th year of exceptional market research for professionals and serious investors) and The Street Smart Report Online at www.StreetSmartReport.com. Mr. Harding has been consistently ranked in the Top Ten Timers for years. He recently authored the book, Riding the BearHow to Prosper in the Coming Bear Market, $12.95. The book introduces The Seasonal Timing System© which tripled the return of the S&P 500 over the last 35 years with 50% of market risk and just two trades a year. Available at most book stores, amazon.com, barnesandnoble.com or StreetSmartReport.com.
