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Jesse

The Lorintine SITREP

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As summer unofficially comes to an end this Labor Day weekend (summer doesn’t officially come to an end until September 22), most families have already wrapped up their summer beach vacations.  But what exactly defines a good beach?  In a survey of Americans of what is “very important” when considering a nice beach, ‘no marine debris’ and ‘good water quality’ led the rankings with ‘scenic beauty or view’ closely behind.  At the bottom of the list, respondents appear not to care whether fishing or surfing was available.

 

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Nine years into the current bull market more and more are beginning to wonder “how much longer can it go on?”  Tony Dwyer, equity strategist at Canaccord Genuity, reiterated his S&P 500 target of 3,200 for the end of this year (a nearly 11% rise from current levels), based on the strong manufacturing report this week.  Dwyer went further and projected the index to rise to 3,360 in 2019, highlighting his view that a recession isn’t lurking “anywhere close”.  He wrote “The Institute for Supply Management (ISM) showed that the manufacturing sector remains on very solid ground.  History shows that since 1950, the ISM typically peaks well before the economy enters recession or the S&P 500 hits the cycle high, especially over the past three levered economic periods.”  Dwyer notes that on average the Institute for Supply Management’s manufacturing reading peaked a median 31.5 months before the start of a recession, and that the S&P 500 usually gains about 35.4% in the subsequent two years following the peak.  While there are a couple of exceptions to his rule, Dwyer notes that the inflation and interest rate environments then were quite different from the current situation. (chart from Canaccord Genuity)

 

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With midterm elections less than two months away, a divisive political atmosphere and the aging bull market have investors particularly on edge.  The vote to be held on November 6th comes at a time of unusually high political uncertainty with both houses of Congress at stake and key economic issues such as trade and taxes in the balance.  According to the Wells Fargo Investment Institute, the S&P 500 sees an average pullback of nearly 19% in midterm-election years, based on data going back to 1962 (or 14 midterm cycles).  However, in the year after the midterms the S&P climbs more than 31%, on average.  Craig Holke, an investment strategy analyst at the Institute writes, “It does not matter which party was in charge before or after the midterm election.  The removal of uncertainty and of constant media attention allows markets to resume focusing on fundamentals.”

 

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3 hours ago, Jesse said:

With midterm elections less than two months away, a divisive political atmosphere and the aging bull market have investors particularly on edge.  The vote to be held on November 6th comes at a time of unusually high political uncertainty with both houses of Congress at stake and key economic issues such as trade and taxes in the balance.  According to the Wells Fargo Investment Institute, the S&P 500 sees an average pullback of nearly 19% in midterm-election years, based on data going back to 1962 (or 14 midterm cycles).  However, in the year after the midterms the S&P climbs more than 31%, on average.  Craig Holke, an investment strategy analyst at the Institute writes, “It does not matter which party was in charge before or after the midterm election.  The removal of uncertainty and of constant media attention allows markets to resume focusing on fundamentals.”

 

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Interesting data.  Is it actionable?  I wonder if a momentum based system would have you out during the correction and back in during the up move?

 

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5 hours ago, Rogers said:

Im usually pretty skeptical of market anomalies like this but this is actually really interesting and makes logical sense.   Did they have something similar but for presidential election years?  If this is a true effect you would think the same should apply to main election years. 

 

 

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The number of new jobless claims just reached its lowest level since November of 1969.  That alone is impressive, but to truly get an understanding of the tightness of today’s labor market it has to be compared to the size of the U.S. labor force.  Indeed, the U.S. labor force has more than doubled over the last 49 years from 81,106,000 people to 161,776,000 last month.  Jobless claims adjusted for the size of the U.S. labor force, are now at the lowest level since the Department of Labor started reporting monthly jobless claims in 1967.

 

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Remember all those predictions that Emerging Markets (both stocks and bonds) would be the breakout winners of 2018?  Oops.  U.S. investors are to be forgiven for thinking that 2018 so far is yet another good year in the current long-running bull market, because it is – for them.  But as the chart below from research firm Macrobond shows, the U.S. is pretty much alone.  Even U.S. bond investors are modestly underwater for 2018 through Q3.  And Emerging Market debt and equity?  Fuggedaboudit – they are deeply in the red.

 

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The Dow Jones Industrial Average notched its 15th record close of the year this week, but not all analysts were enthused.  Jason Goepfert, president of Sundial Capital Research, noted that the overall market isn’t nearly as bullish as the Dow would indicate.  The Dow Jones Industrial Average is made up of just 30 of the largest stocks traded, but for a bigger picture many analysts turn to measures that track the thousands of stocks traded by looking at a measure known as ‘market breadth’.  The disconnect between the benchmark index and overall market breadth, such as is happening now, tends to occur when a narrowing group of stocks props up the overall market.  Goepfert tweeted a chart showing past instances when the Dow hit a 52-week high at the very same time that less than 50% of all stocks traded on the New York Stock Exchange were above their long-term 200-day moving average.  The last two times this scenario has happened were a cluster in 1999, right before the dot.com crash of 2000, and again in 2007, just before the financial crisis of 2008-9.  (Chart from SentimenTrader)

 

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After the market volatility last week many are beginning to wonder if the bull market is over, or just taking a break.  Nick Maggiulli, analytics manager at Ritzholtz Wealth Management, offered his prediction for the market based on the fundamental concept of economics.  Basically, when the average investor allocation to stocks is high (greater than 70%), returns for the following 10 years tend to be low, and investors should buy bonds.  Oppositely, when average investor allocation to stocks is low (less than 50%), the following 10 year returns tend to be high.  Therefore, investors should then sell their bonds and buy stocks.  Since 1987, investing in this manner would have turned $1 into $43, versus just $24 for the buy-and-hold crowd.  And where is the indicator now?  According to the model, investors should have sold stocks last December when allocations crossed the 70% threshold.  Since then, allocations have remained in the 65% - 73% range, nowhere near the 50% threshold for buying again.

 

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Needless to say, investor anxiety is running high.  CNN’s Fear & Greed Index has swung from a reading of 70 indicating “Greed” down to just 7 indicating “Extreme Fear” in the span of just one month. 

 

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Market blogger and Chartered Market Technician Ryan Detrick looked for other instances of similar market turmoil in previous Octobers.  Detrick found that since 1950 there have been 7 other years that were positive year-to-date going into October and saw the S&P 500 turn negative year-to-date during the month.  “The good news”, he writes, “is the final two months were higher 6 times and up 4.1% on average.”

 

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As Americans prepare to go to the polls in what is likely to be one of the heaviest turnouts ever for a midterm election, mutual fund company Oppenheimer released a research note regarding midterm elections and their effects on the market.  They note that midterm elections rarely favor the political party of the sitting President.  Their research notes the party of the President almost always loses House and Senate seats in the first midterm election, even if the President is relatively popular.  Many investors fear that if Republicans lose control of the House it would derail President Trump’s pro-business agenda and bring an end to the current historic bull market.  However, the Oppenheimer report showed that of the 15 times that the House changed the party in control at midterm elections, 12 (or 80%) of the following years were positive, and that overall 78% of the years following midterm elections were positive.

 

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It is well-known that the United States economy is the largest in the world, but by how much?  Mark Perry at the American Enterprise Institute created a very interesting infographic that shows each of the individual states in the U.S., labeled with the name of a country of comparable GDP.  For example, the GDP of Colorado is equivalent to the GDP of Ireland, Texas is equivalent to Canada, etc.

 

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As an example of how quickly assets in the financial markets can go from “hero to zero”, the website visualcapitalist.com created a graphic to show the true carnage that has occurred among recent tech market leaders.  The so-called “FAANG” stocks (Facebook, Amazon, Apple, Netflix, and Google) have now each officially dropped in to “bear” market territory—defined as a drop of 20% of more from a recent high.  Facebook has fared the worst, down almost 40%, while Google is off “just” -20.7%.  As you might expect, these stocks have been the favorites of younger investors, who have taken it on the chin of late.

 

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As November came to a close, many investors who were diversified across numerous asset classes have seen a rather noticeable decline in the value of their investment accounts.  While the first inclination may be to blame themselves or their financial advisor, the reality is that there were very few “safe havens” that avoided the October-November swoon.  Research from Deutsche Bank shows that 90% of the 70 largest asset classes they follow are on track to post negative returns for the year.  As Deutsche Bank notes, both stocks and bonds could both finish the year lower, a result that hasn’t happened in more than a quarter of a century.

 

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