Consolidation typically starts now and ends in May

The U.S. presidential election is top of mind for investors.

Typically, the pre-election year is the strongest in the four year cycle. In fact, since 1948, the average gain for the Dow Industrials has been 11.9%, while the S&P 500 has gained 16.1% during the pre-election year.  Historically, the government stimulates the economy in the pre-election year.

2019, a pre-election year, has been no different.  The Fed has cut rates three times this year.  The first half of 2019 had the strongest government spending since 1990.  Both accomodative policies should help drive growth in the business and consumer sectors in future quarters.

The typical year-end rally in the pre-election year has stalled out.  The stock market has endured a trading range from early September of the pre-election year to mid-May of the election year (chart below).

According to Ned Davis Research, the 2020 S&P 500 Cycle Composite (which combines the one-, four-, and 10-year cycles) is stronger than the four-year cycle alone, but it still shows choppiness in the first half of the year.

Over the next few quarters, the capability for companies to achieve earnings expectations and clarity on the trade war with China will likely be important catalysts for the market.  If forward progress isn't made, the stock market remains vulnerable and the choppy phase of the typical election cycle is a likely scenario.

Looking to 2020, a common variable to an election year rally is when the market has identified the likely presidential winner.  Once the uncertainty has been lifted, the market has tended to move higher, regardless of political party.

"There is a fifth dimension, beyond that which is known to man. It's a dimension as vast as space and as timeless as infinity.  It is the middle ground between light and shadow, between science and superstition, and it lies between the pit of man's fears and the summit of his knowledge. This is the dimension of imagination.  It is an area which we call The Twilight Zone."

These words were written for the popular show of the early 1960s (and subsequently used in the mid 80s and soon in a 2019 reboot), but he could have also been talking about how many of us feel these days.  Allow me to channel my inner Rod Serling for a few moments.

What if California were allowed to peacefully secede from the US?  14% of the United States' GDP would be gone, in  another country.  What currency would they use?  Would any special restrictions be placed on those traveling to and from there? How would companies and individuals interact for buying products and services there?  Could certain technology or movies be restricted for reasons other than national security, such as politics, or to protest unfair tax treatment by the rest of the US or other countries?  Is secession really our best option?

These are the type of questions that the United Kingdom is dealing with in Brexit.

As you can see from the above graphic, California's economy is roughly the size of the United Kingdom's.  Britain also makes up roughly 14% of the European Union's GDP.  Brexit was born from several factors, including economic frustration & nationalism.  The disagreement over how to exit couldn't come at a worse time, as the rest of the world also appears to have growth concerns, and London is considered the financial center of the EU.

So here we are, in between the "light" of the first three quarters of 2018, the "shadow" caused by Brexit and other factors (see my last post from November 30th), and the hope of a recovery.  It is easy to base investment decisions from "the pit of your fears" rather than "the summit of your knowledge" at this point, because knowledge requires certainty and fear requires none.  Instead, I suggest to reevaluate your perception, revisit your confidence in your plan, manage your current reality & build in flexibility for change for a new one.  How else could you invest with such uncertainty, "between science and superstition", in the Twilight Zone?

If you're like me, you will be extremely happy to have the end of political ad season. As I'm writing this post, nothing has been officially determined yet, but we'll most likely end up with a split Congress (Democratic House, GOP Senate.)  Ultimately, while that probably means political gridlock until they can find some common ground, for investors it will mean a return to focusing on the sustainability of economic growth, corporate profits, interest rates, and so on.  Remember, government moves slowly.  The new Congress will be seated in January, and it would be probably another 6-9 months before anything were implemented and economic impact felt.  Bottom line:  watch the market fundamentals.

The greatest wild card will continue to be the trade conflict with China.  Perhaps that may be the common ground that is needed...at least for the next 12 months before we start hearing about the primaries for 2020.

Enjoy it while you can!  To talk more about how these economic times may affect your personal financial plans, give us a call at 708-960-0520 or schedule an Introductory Call using the Appointments tab above.

Lately, it seems that we're bombarded with new articles or stories with every news cycle regarding our modern politics & its effect on the economy or stock market. Some days you just want to escape the craziness and the anxiety in every reporter's voice or headline. It can be downright exhausting, especially when you think about how it affects you & your money.  All of this had me thinking about...Donald Rumsfeld.  Why, you ask?

In 2002, former Secretary of Defense Donald Rumsfeld was answering a question in a press briefing (see the clip below). He was actually describing a concept that was invented in 1955 by Joseph Luften & Harry Ingram which was called a Johari Window.

There are 4 quadrants to consider.

1. The Arena/Open Area = Known by Us; Known by Others
2. The Blind Spot = Unknown by Us; Known by Others
3. The Facade/Hidden Area = Known by Us; Unknown by Others
4. The Unknown Area = Unknown by Us; Unknown by Others

In my opinion, if we deal with what we know or believe based on research, we can work with you to build a plan that is flexible.  In summary, we believe that interest rates will increase moderately, and that there will likely be a split Congress which could affect fiscal policy in the next couple of years.  I also believe that much of the Russia investigation, while historically significant regardless of outcome, will be mostly noise in an economic sense.  It is much more of a concern to gauge the viability of sustained, organic, economic growth given the subdued real wage growth over the last 12 months compared to the increase in the Consumer Price Index, as well as the consumer's ability & willingness to continue spending.  

For a more detailed look at your situation, visit the Appointments section of our website today to schedule a phone call or meeting.