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Financial Industry Insights from Advisors Asset Management
On October 17, 2016
AAM Viewpoints - Electing to Stay Bullish…
We discussed last time how we felt corporate earnings were bottoming and we continue to believe this is true and our outlook is 3rd quarter S&P 500 earnings should post slightly positive growth (~1%) though the current analyst consensus is for a contraction (6th quarter in a row) of 1.6%. However, we have to recall how earnings estimates (both short and longer term) work. Short-term (next quarter) earnings estimates tend to be way too pessimistic and longer term (1 and 2 years out) way too optimistic. That is why, historically, 73% of quarterly earnings reports come in better than expected and why longer-term estimates rarely come to fruition. A year ago the estimates were for greater than 10% growth and we think we will most likely come in close to flat. Thus, when it comes to earnings estimates for the aggregate market, it is probably best to settle somewhere in the middle between the overly pessimistic short-term expectations and the overly optimistic longer-term expectations. However, to be fair, there are always upcoming events, both seen and unforeseen, that can have dramatic effects and one big one currently is the upcoming U.S. elections.
We won’t waste any time stumping for one presidential candidate over another or making any predictions because these seldom pan out (and we don’t want to embarrass ourselves). Instead, we will just take a look at what has occurred historically when a new president is elected, and thankfully that should occur in three weeks. Again, we don’t know for sure who will be elected on November 8th but we do know that it will be a new president who will be sworn in as our 45th president on January 20, 2017. Going back to the 1932 election, when Franklin D. Roosevelt was elected as president, there have been 10 times in which a new president was elected. Nine out of 10 times the newly elected president was from a different party than his predecessor. The one exception was when George H.W. Bush was elected after Ronald Reagan’s two terms in office. Looking at those 10 occurrences, we see that the S&P 500 was up in the first calendar year of the new president’s term five times and was also down five times. The total return range for the S&P 500 was -11.85% to +44.08% and the average was 10.44%. In addition, for the single instance when the political party stayed the same, 1989, the S&P 500 had a total return of 31.22%. To summarize, based on history, we are essentially looking at a coin toss on whether returns will be positive or negative in the first year of a new president’s term but there is a bias to the positive side concerning the magnitude of those returns. This is most likely explained by renewed optimism driven by the introduction of a new administration.
Is this alone enough to have us believe returns for the S&P 500 will be positive in 2017? No, but we do believe the end of the earnings recession combined with continued low (but rising) rates and fiscal stimulus should keep the bull market alive and well into 2017, but we are clearly due for increased volatility and possibly a pullback as we navigate the elections and another FOMC (Federal Open Market Committee) rate hike.
For those looking to game a certain component of the market depending on who they think will be elected and what policies they will attempt to enact, we offer this as a cautionary tale. President Obama was elected on 11/4/2008 with a pledge to revolutionize the U.S. Healthcare Industry and the Patient Protection and Affordable Care Act (also known as ObamaCare or the ACA) was signed into law on 3/23/2010. This was considered by many as the death knell for healthcare stocks. However, the S&P 500 Healthcare Index on 11/4/2008 outperformed the S&P 500 by 45.37% (through 10/13/2016) and by 34.95% on 3/23/2010. Given this, we remain both bullish and diversified and are just trying to stay sane through the next three entertaining weeks.
CRN: 2016-1003-5565R
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com.
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