two-day plunges

After "Liberation Day" (April 2), in which President Donald Trump unveiled tariff rates far higher than virtually all investors suspected, the S&P 500 (SNPINDEX: ^GSPC) experienced a whopping 10.5% plunge.

That's the fourth-worst two-day plunge in the past 75 years. Not only that, the April downdraft came after the market had already been on a downward trajectory since mid-February.

The good news for investors? History suggests that this is likely a great time for long-term-oriented investors to buy.

According to Stansberry Research, the April 3-4 tumble is the fourth-worst two-day stretch in the market since 1950. Looking at the other top 10 two-day plunges, all occurred at the outset of genuine crises -- the 1987 "Black Monday" plunge, the Great Financial Crisis of 2008, and the outbreak of COVID-19 in 2020:

As you can see, following these two-day plunges, stocks exhibited mixed performance one, three, and even six months later, with positive average returns but also with a very wide skew. In fact, even after the two-day plunge that ended on Oct. 7, 2008, the market was 17.2% lower six months later.

However, when one looks out a year beyond these 10 other instances, the average return is a whopping 27.2%, with every single instance in the green and the biggest one-year recovery at 59.2%. Look two years out, and the average return is 40.4%, with gains as high as 69.5%.

Warren Buffett is famous for the quip, "Be fearful when others are greedy and be greedy when others are fearful." Certainly, if the history of nauseating two-day drops is any guide, Buffett has historically been right on all counts.

But it's not just Buffett who has long touted the virtues of buying when others are selling and selling when everyone wants to buy. Buffett peer and Oaktree Capital founder Howard Marks, also a storied value investor, summed up the case nicely in his recent investment memo titled Nobody Knows (Yet Again).

In that memo, Marks notes how Oaktree went ahead and bought into both the 2008 financial crisis and the COVID-19 crisis, despite being highly uncertain about the future, unsure whether there would be further downside, and having no idea how or when the crises would end. All he knew was that financial assets were now heavily discounted.

The reason Marks takes a price-and-valuation-based approach and not one based on trying to game out future events is that:

We can't confidently predict the end of the world; we'd have no idea what to do if we knew the world would end; the things we'd do to gird for the end of the world would be disastrous if it didn't end; and most of the time the world doesn't end.

Buffett and Marks are, of course, not the first to espouse contrarian investing. After all, the phrase "Buy when there is blood in the streets" is attributed to 18th-century British nobleman Baron Rothschild, who coined the term after he bought into the panic following the Battle of Waterloo, which ultimately yielded him a fortune.

But there's also a case against buying today

Certainly, a lot of history suggests that buying into this market, while perhaps risky in the near term, is nearly certain to pay off in the long term. However, there are a couple of counter-narratives investors should be aware of that could make this time different.

First, the market is more expensive today than it was after those prior crashes. After the 1987 crash and the 2008 crash, the S&P 500 price-to-earnings (P/E) ratio was in the low- to mid-teens. In March 2020, the valuation was higher, in the low 20s. Today, the S&P 500 is around 26.9 times earnings.

While it's true that the average valuation of the market has been pushed up by the rise of the highly valued and heavily weighted "Magnificent Seven" stocks in recent years, the higher valuation on a historical basis means investors might not enjoy such historically robust post-drop returns from here.

Second, the implementation of tariffs, unlike these other instances, risks pushing up inflation, which may tie the hands of the Federal Reserve. Remember, the Fed responded to Black Monday, the 2008 Financial Crisis, and the COVID crisis by lowering interest rates. The Fed even went so far as to cut the Federal Funds rate to zero in 2008 and 2020 while also purchasing longer-term U.S. Treasuries, which kept rates low to stimulate the economy.

In recent days, various Fed officials have stated publicly that since tariff policies could drive up inflation, the Federal Reserve may be more limited in its ability to provide monetary stimulus this time. And whereas the Federal government in 2008 and 2020 was doing everything it could to help the situation, today the problem has actually been caused by the government, at least the Executive branch, which is still in the beginning of its four-year term.

But don't be paralyzed; stick with your plans

So, for all these reasons, it's quite possible that the market could experience further downside from here. On the other hand, the current administration also has more ability to rectify the situation than the administrations during those other market downturns, since it's also the entity that ignited this particular market crash in the first place.

All in all, if you do have investable dollars and engage in regular stock buys or 401(k) or IRA contributions, there's no reason not to invest today as long as it's within your financial plan and risk tolerance. As history has shown, times of great uncertainty are often the very best times to purchase stocks.

That said, the differences between the current crisis and 1987, 2008, and 2020 keep this investor somewhat cautious. Therefore, investors may want to think twice before committing heavily to stock-buying and/or using leverage to do so.

Here we go again (?)

Stocks have been on fire this year.

YTD, the S&P 500 is up 26.9%.

What's interesting is that the S&P is on pace to close up 20% or higher for the second year in a row. (2023 was up 24.2%.)

That's a feat rarely seen in the past.

I have seen others state the same. But they do so as a cautionary tale and tie it to the dot-com bubble.

That's all well and fine.

But I see it a bit differently.

The dot-com bubble 'burst' in 2000 when the S&P dropped by -10.1% for the year. (That was also Y2K, which caused plenty of panic leading up to it, but came and went pretty much without a hiccup.)

The point is, the dot-com bubble was preceded by the dot-com (technology) boom.

In 1995 the S&P was up 34.1%.

In 1996 it was up 20.3%.

That was the first time it was up 20% or more for two years in a row since 1954-55.

So, what happened in 1997? It was up another 31.0%.

1998? Up another 26.7%.

And in 1999, it was up 19.5%.

A spectacular rally that lasted 5 long, glorious years.

Yes, the dot-com bubble arrived in 2000. But not before people got rich over the preceding 5 years with a 220% increase in the index, while plenty of individual stocks were up several hundred percent to several thousand percent.

And I'm here to say that I believe we could possibly see the same thing again now. Maybe 5 years or more of boom times – for similar reasons, and some unique to the present day.

***

Possibly.

-- Kevin Matras, Weekend Wisdom, 12/13/24

interest rate cuts and the stock market

We all know that the Fed has reached the end of its hiking cycle and now has interest rate cuts in sight. From a historical perspective, the start of the easing process has been bullish. Going all the way back to 1921 and spanning 24 periods, the DJIA advanced an average of 15% a year following the first cut.

The narrative surrounding interest rate cuts becomes even better when we factor in whether or not the economy was in a recession. When the Fed has avoided recession, stocks have ripped higher, up 24% on average a year later.

In addition, the Fed has made it clear that it plans to cut rates slowly. The S&P 500 widely outperforms in the 1st year of slow easing cycles versus fast ones. Why is that the case? Because in fast easing cycles, it usually means something has gone wrong (such as the start of easing cycles in 2001 and 2007). But in this case, with the economy on sound footing, a slow easing cycle should bode well for stock returns.

Regardless of what you've heard in the financial media, interest rate cuts don't have to doom stocks, particularly when there is no recession and a slow easing cycle.

Election And Seasonal Cycle Stats Point to More Strength Ahead

We're in the 4th year of President Biden's term. Another reason to be bullish is the fact that election years tend to see enhanced gains when we have a new President that's still in his first term. Dating back to 1950, the S&P 500 gains an average of 12.2% under new Presidents, far above the typical election year return of 7.3%.

-- Weekend Wisdom, 3/23/24

Presidential Election Cycle

The stock market has historically performed better in the third year of a presidential cycle. The theory behind this is that politics and its effect on economic policies can cause the stock market to perform better. Investors expect better business conditions, corporate bottom lines and stock prices in the year before a presidential election.

On this page, we study the effect of the presidential cycle and political parties and their effects on stock market performances. The data is from 1928 to 2023, and updated daily.

As shown in the table below, the market indeed performs the best during the third presidential year of a four-year term. The average gain of the third presidential year is 13.96%. The second best year is the fourth presidential year, with an average gain of 7.38% . The worst year is the second presidential year, with an average gain of just 3.33%. On average, the market has gained 7.82% a year since 1928.

Average annual gains in different presidential years and political parties (%) since 1928

         Democrat Republican    Average

Year 1  12.89%   -0.76%    6.63%

Year 2   3.70%    2.89%    3.33%

Year 3  15.42%   12.23%   13.96%

Year 4   9.39%    5.21%    7.38%

Average  10.35%    4.90%    7.82%

The table also shows a much higher average gain when a Democrat is in the White House. On average, a Democratic president sees an average annual return of 10.35%, while a Republican president just sees an average gain of 4.90%. The third year of a Democratic president would see the highest gains, with the annual average of 15.42%. Among the different combinations of political parties and presidential years, the third years with Democratic presidents see the best returns, followed by the third years with a Republican president. The worst years are the first years with a Republican president.

Out of the last 97 years, there were 65 positive years, or 67%. These are the percentages of the years that have seen positive returns. Again the third years stand out with more positive returns. A first year with a Republican president did the worst.

Kevin Matras outlook

[12/23/22] Regardless of how this year ends, statistically, next year should be much better.

The 4-year Presidential Cycle shows that year 3 (that's 2023), is the best year of all 4 years. In fact, since 1950, stocks have always gone up in the year after midterms, with an average 12-month forward return of 18.6%.

[9/30/22] It’s been a rough year so far.

40-year high inflation, which forced the Fed to aggressively raise rates in an effort to bring it down, has been weighing on stocks.

As tough as this year has been, I’m reminded of the comparison that was made between the first half of this year, and the first half of 1970.

This year’s first half performance (the S&P was down nearly -21%), was strikingly similar to that of 1970 (also down -21%). And in both periods, high inflation was an issue.

But in the second half of 1970, the S&P was up 27%.

Of course, that doesn’t mean that’s how it’ll go for the back half of this year. But it doesn’t mean it won’t either.

Granted, the last few months haven’t been any easier. And there’s only 3 months left of this year. But with plenty of economic positives backstopping the economy right now, not the least of which is a strong labor market, there’s definitely a chance that the market is being too pessimistic.

While we unofficially saw a recession after Q2 GDP fell by -0.6%, which followed Q1’s -1.6% (two quarters in a row of negative GDP is the technical definition of a recession), consumer demand remained strong throughout. So did corporate earnings. And the jobs market stayed sizzling hot.

You can also see that in the GDI numbers (Gross Domestic Income), which measures U.S. economic activity via the income earned for these activities. Usually, the GDI and GDP (Gross Domestic Product) are statistically very similar. But unlike the GDP, the GDI was up in the first half of the year with a positive 0.5% annualized growth rate, while GDP was down.

Will these two measures converge? If so, will GDP rise to meet GDI, or will GDI fall to meet GDP? Or maybe a little bit of both? TBD. But, at the moment, GDP forecasts are pointing to plus signs for the rest of the year.

Q3 GDP is only expected to eke out a 0.3% gain. But Q4 is expected to be better, with full year estimates showing another year of growth. (It’s no longer a recession when the economy starts growing again.)

And the Fed is predicting 2023 to be even better still with a 1.8% GDP growth rate.

So there’s plenty of positives in the market right now. (The market happens to be ignoring them at the moment. But they are there nonetheless.)

And with the market seemingly pricing in the worst-case scenario (deep and long recession), stocks are primed to rally once it looks like the worst-case scenario won’t come to pass (shallower and shorter recession).

Peak Inflation Is Behind Us

One of the key factors which will likely determine where the market goes from here, will be inflation, and therefore, interest rates.

Even though inflation is still too high, it has been ticking down for the last few months.

Headline inflation, according to the Consumer Price Index (CPI), is at 8.3% y/y, with core inflation (less food & energy) at 6.3%. That’s down from its peak of 9.1% and 6.5%.

While that dip is not a lot, and it’s a far cry from the Fed’s goal of getting it back down to 2%, the mere fact that it’s no longer making new highs, and instead is ticking lower, is a step in the right direction.

(Oil prices, for example, have fallen sharply. After trading over $130 a barrel, crude oil is now trading at $82. That’s a decline of -37% in a matter of months. And that’s helping to ease inflation concerns.)

A few months ago, many were expecting inflation to soar above 10% or more. Now, expectations are for it falling to 5-6% next year, with the core rate falling even lower.

And that means the Fed may not have to raise rates as much as people are fearing.

Are Stocks Undervalued?

Let’s also not forget that valuations are down.

The P/E ratio for the S&P is at multiyear lows, and is trading below its five-year average.

And that makes stocks a bargain.

Of course, if earnings drift lower, valuations will creep up. But there’s plenty of room for stocks to remain relatively cheap.

And the earnings outlook is still forecasting growth.

Add in another trillion dollars in stimulus between the CHIPS Act and the Inflation Reduction Act, and that should extend the growth outlook even further.

How Do Stocks Perform Around Midterms?

Many are familiar with the Presidential Cycle and the markets. But many may not know that the Presidential Cycle covers all for years of a presidency.

Of particular interest is the midterm portion of the cycle, which is where we are right now.

And historically, it’s amazing to see how favorable this cycle is for investors at this point in time.

Developed by Yale Hirsch, of the Stock Trader’s Almanac, the theory suggests that the stock market follows a pattern which correlates with a U.S. president’s four-year term. The election cycle consists of the post-election, midterm, pre-election, and election years. 2022 is an example of a midterm year, i.e., the second year in the 4-year presidential cycle.

In the first two years after an election, the second year tends to be the weakest. In fact, it’s the weakest of all four years. Congressional elections take place – and with them, they bring the potential to shift the political backdrop.

Hirsch discovered that wars, recessions, and bear markets (sound familiar?) tend to start in the first two years of a president’s term. This year, the market entered the weak spot of the cycle. And with an aggressive Fed, high inflation, and the ongoing Russia-Ukraine war, the weakness in stocks was amplified.

Those who know their market history will find it somewhat unsurprising that the start to this year was rough. The second and third quarters of midterm years are historically quite weak. (History repeating itself once again.)

But more prosperous times typically lie ahead in the latter half of the cycle.

In fact, we’re entering the most bullish part of the calendar – Q4 of year 2 in the 4-year presidential cycle (the second-strongest quarter of all 16 quarters), sporting an average return of 6.6% (since 1950); and Q1 of year 3 (the strongest quarter of all 16 quarters), with a 7.4% average gain.

And when we factor in that the third year of the presidential cycle has historically witnessed the best performance of all four years, the outlook for stocks looks even brighter.

-- Kevin Matras, Weekend Wisdom, 9/30/22

the market and the midterms

If you have money in stocks during this bear market, you are probably having a rough year. The bond market has been miserable, too. There have been few bright spots for investors.

Yet there is one positive portent right now: the calendar.

With a surprising degree of consistency over the past 100 years or so, stocks have followed a broad pattern that coincides with presidential terms. The months leading up to midterm elections have generally been the worst in what is known as the four-year presidential election cycle. But the stock market is about to enter a sweet spot. Stocks have usually rallied in the year after the midterms — no matter which side wins.

Market veterans take these patterns seriously but aren’t counting on them in an economy plagued by soaring inflation, rising interest rates and fears of a recession.

“We’ve studied the presidential cycle carefully, and there’s something to it,” said Philip Orlando, the chief equity market strategist for Federated Hermes, a global asset manager based in Pittsburgh. “But it’s possible that this year we will need to invoke the four most dangerous words in investors’ lexicon: ‘This time is different.’”

Gloom in the markets

Consider, first, the overall pessimism in the markets.

In the current climate, this comment, from Mark Hackett, the chief of investment research at Nationwide, counts as fairly upbeat. “We are now entering a stage where all signs point to a recession — assuming we aren’t already in one,” Hackett said. But, he added, “the recession may already be priced into the markets, in which case the next bull run may be faster and come earlier than many investors expect,” he said.

The latest government figures show that the economy grew at a 2.6% annual rate in the third quarter. But the Federal Reserve says interest rates need to rise and stay high until the inflation numbers come down. The Fed’s monetary tightening is aimed at slowing the U.S. economy. Whether the consequences for working people will be mild or savage isn’t clear.

In the meantime, the coronavirus pandemic festers, the death toll from Russia’s war in Ukraine mounts, interest rates are rising elsewhere around the world, global energy costs remain elevated and U.S. relations with China are fracturing. All these concerns are weighing on the markets.

The presidential cycle

The party of a sitting president tends to lose seats in Congress in midterm elections, and high inflation makes matters worse for incumbents. Those are key findings of Ray Fair, a Yale economist whose long-running election model relies only on economic factors and shows the Democratic Party in an uphill climb this year.

His model, along with the polls, the prediction markets and many forecasters, suggests that Republicans are likely to win control of the House of Representatives. The Senate is up for grabs.

The issues in this election are enormous, and the vast differences between the two political parties are well chronicled.  Yet, for the stock market, history suggests that the outcome of the elections may not matter much. Shocking though this may be, since 1950, the midterm elections have brought an upturn for stocks, no matter which party has won, and no matter the issues.

The market has generally flagged in the months before the midterms and prospered after them. And it has often excelled in the year after the midterms, typically the best of the four-year presidential cycle.

Ned Davis Research, an independent investment research firm, compared stock returns for 1948 through 2021, broken down by the four years of a standard presidential term. It used the S&P 500 and a predecessor index:

12.9% for Year 1.

6.2% for Year 2, the year of the midterms.

16.7% for Year 3, the year after the midterms.

7.3% for Year 4.

[But why?  There is no certain answer.  The explanation I prefer is that presidents try to stimulate the economy - and, indirectly, bolster stocks - for maximum effect in presidential elections.

Their first year in office is the best time to make politically painful moves, which often lead to weak markets by the time the midterms come around.  After losses in the midterms, though, presidents try to give the economy a surge through expansionary fiscal and monetary policy, settring themselves (or their successors) up well fo the election.

Is this an exception?

Two powerful factors — the negative effect of a slowing economy and the beneficial influence of the midterm elections — may be in conflict, Ed Clissold, the chief U.S. strategist of Ned Davis Research, said in an interview.

On the positive side for stocks, Wall Street usually responds well to gridlock — the stasis that can grip Washington when power is divided — and such a division is the consensus expectation for the midterms. But, over the last century, when bear markets have been associated with recessions, no bear market has ever ended before a recession started, Clissold has found. The last time there was a recession in the year following the midterms occurred after the 1930 elections, during the Great Depression, a terrible era for stocks and the economy.

“A recession would be expected to be more important than the election cycle,” he said.

Practical steps

There are many ways of making bets on specific election outcomes, though they entail risk that I don’t favor.

For example, if Democrats defy the odds and hold onto both houses of Congress, infrastructure spending will be expected to increase. Matthew J. Bartolini, the head of exchange-traded fund research at State Street Global Advisors, said, to bet that way, you might try SPDR S&P Kensho Intelligent Structures ETF. It includes “intelligent infrastructure” companies — like Badger Meter, which supplies utilities with water-metering equipment, and Stem, which provides software and engineering for green energy storage.

If you want to bet on gridlock, you may assume that a split government will be bullish for the overall market. Then again, the need to raise the federal debt ceiling in 2023 could become a market crisis. Republicans have vowed to use the issue as leverage, forcing President Joe Biden to cut federal spending. Similar maneuvering in 2011 led to the downgrading of U.S. Treasurys by Standard & Poor’s, sending tremors through global markets.

Tactical bets on election or economic outcomes are unreliable. That’s why what makes sense to me, regardless of the immediate future, is long-term investing in diversified stocks and bonds using low-cost index funds that track the entire market. This approach requires a steady hand, a horizon of at least a decade and enough money to safely pay the bills.

Short term, try to fortify your portfolio and build up your cash so you can handle any economic or electoral outcome.

-- Jeff Sommer, New York Times (Star-Advertiser, 11/6/22)

Jay Powell wants you to lose money

Seeking to quell inflation, the Federal Reserve has raised its benchmark interest rate from near zero to above 3% in record time. And at its most recent meeting, on Sept. 21, the central bank projected it would add an additional one and a half percentage points in the coming months—promptly sending markets into a nosedive.

We’ve officially entered a very different financial climate, where prudent investors may want to reassess where they put their money. The Fed’s principal policy lever is interest rates; when they go up, the value of future cash flows goes down—hurting assets from stocks and bonds to housing and many currencies. So when Fed Chair Jerome Powell tells you he wants to reduce inflation by raising rates (aka tightening), he’s telling you the central bank needs investors to lose money. The goal is for those losses to seep into the rest of the economy when capital investment and consumption decline, slowing growth, demand, and—ultimately—inflation.

To understand how we got here, you have to go back to the 2008 financial crisis, when the Fed was doing exactly the opposite. The central bank felt forced to take rates to zero to alleviate the distress indebted households and companies were feeling. Lower rates meant smaller interest payments for debtors seeking to repair their balance sheets. In 2008, household debt topped 97% of gross domestic product; today, it’s about 75%, the lowest in 20 years.

For savers, though, high-interest accounts that once yielded 5% interest suddenly paid 1%. The annual return on $50,000 in savings fell to $500 from $2,500, forcing people who relied on interest as a principal source of income to rethink their strategy. That usually meant turning to riskier assets, so money poured into stocks, pushing the S&P 500 index up sevenfold from its post-crisis nadir to its peak in January.

With the Fed funds rate near zero, ordinary savings accounts paid minimal interest, spurring some to quip that “cash is trash.” This mantra seeded the psychology that fueled crypto assets and meme stocks, even as it created a windfall for the economy, allowing companies from Amazon.com to General Motors to Marriott to boost capital investment. Sure, some of that was foolhardy. Australia’s BHP Billiton, for example, poured $20 billion into US shale oil projects early in the 2010s. That paid off when crude rose to more than $100 a barrel, but it looked less wise when oil fell below $30. By 2017, BHP was taking billions in writedowns on those investments as shale oil flooded the market.

By that time, the US economy was back on track. With unemployment sinking to 4.3%, cheap money had served its purpose, and the Fed slowly began raising rates. It soon found the economy was still too weak to handle them, so it reversed course in 2019. Then it had to try other stimulative measures in 2020 to reduce damage done by the coronavirus pandemic.

Now the economy can handle higher interest rates—and with inflation above 8% for the first time in four decades, the Fed desperately wants to apply them. In fact, it’s rushing to make up for lost time. As a result, investors are quickly discovering that cash is no longer trash—it’s an important asset class that provides a haven. Imagine if, next summer, your bank were to offer 5% interest on a three-year certificate of deposit. Would you take the sure thing?

Many Americans will, showing just how quickly the psychology of investing has changed. If the slowing economy lowers inflation to more acceptable levels, a host of investment opportunities will look better. Treasury yields and investment-grade bond yields are rising now. At some point soon, interest rates will top out, and the returns from those less risky options will look enticing.

This change in psychology won’t be limited to safe assets. Wall Street is in the midst of a bear market: The S&P 500 this year is down more than 20%, and the Nasdaq 100’s decline has topped 30%. Those returns won’t get much better with interest rates rising, the economy slowing, and corporate earnings taking a hit. So investors have already begun to withdraw money from stocks, with equity mutual funds registering 32 straight weeks of outflows, according to the Investment Company Institute.

They won’t come out and say it, but when members of the Fed’s Board of Governors see this reaction, they’re probably pleased. Capitulation makes their job easier. The quicker asset prices react to the tightening of conditions, the faster inflation will fall. But after the slowdown induced by higher interest rates, the selloff will end and inflation will decline. We’ll be in a new investing regime for the first time in more than a decade. Now is the time to prepare.

-- ByEdward Harrison, September 28, 2022

what the Volcker era teaches us now

When inflation soared 40 years ago, people with patience came out fine.

The cost of living is sky-high, and Jerome H. Powell, the chair of the Federal Reserve, says that battling it is his highest priority. He has raised interest rates to damp down inflation, which hit its highest point in 40 years. Financial markets don’t know quite how to react.

Something similar happened the last time inflation was out of control. Paul A. Volcker was the Fed chair then. He wrung inflation out of the economy, but at a great cost — hurling the nation into not just one recession, but two. Unemployment soared, stocks fell repeatedly, interest rates oscillated and, for a while, bonds looked shaky, too.

It’s worth looking at his era for guidance. 

First, because it had multiple, severe downturns, the Volcker era was disastrous for anyone who traded actively and bet wrong on the direction of the markets. Short-term trading is especially dangerous when the market’s currents are opaque and treacherously strong, as they were back then and may be now.

But, second, the Volcker era was wonderful for those with the patience and resources to ride it out. While Mr. Volcker’s stern treatment of the economy was deliberately disruptive, it ushered in awesome bull markets, in both stocks and bonds.

When Mr. Volcker became Fed chair in 1979, inflation was running above 11 percent annually, and the unemployment rate was almost 6 percent. A bull market in stocks had started in 1974 and it continued months more, even though the Volcker Fed had begun to tighten monetary policy.

On Saturday, Oct. 6, 1979, Mr. Volcker announced that, “No longer would the Federal Reserve set interest rates to guide policy,” Jeremy J. Siegel, the University of Pennsylvania economist, wrote in the book “Stocks for the Long Run.” “Instead, it would exercise control over the supply of money without regard to interest rate movements.”

By reducing the money supply, and letting short-term interest rates float, the Fed was, effectively, letting rates spiral upward.

“Stocks went into a tailspin, falling almost 8 percent on record volume in the 2½ days following the announcement,” Professor Siegel wrote. “Stockholders shuddered at the prospect of sharply higher interest rates that would be necessary to tame inflation.”

By March 1980, the Fed funds rate was an astonishing 17 percent, compared with just 2.5 percent today. It would exceed 19 percent the following year.

The economy slowed so much that it fell into a recession from January through July 1980.

But it wasn’t until Nov. 28, 1980, that a bear market in stocks began.

The S& P 500 lost more than 27 percent during a miserable 20-month period that ended in August 1982. If you were on the wrong side of that move, you lost a ton of money. The second Volcker recession began in July 1981 and lasted until November 1982.

If you hung in during the entire Volcker era, you experienced turmoil but went on to enormous gains in both stocks and bonds. From the day Mr. Volcker took office until the day he left in 1987, shares in the Vanguard S& P 500 stock index fund — the first lowcost broad index fund available to ordinary investors — would have gained 215 percent, according to FactSet data.

An index of the broad bond market, now known as the Bloomberg U.S. Aggregate, would have gained 143 percent in that period. And on the day Mr. Volcker started as Fed chair, the 30-year U.S. Treasury bond provided a yield of more than 9 percent — a guaranteed doubling of your money every eight years, if you had just held onto it. Even better, you could have bought a Treasury bond in September 1981 that paid a guaranteed 15.19 percent for 30 years.

There were big ups and downs in shorter stretches. They scared me away from stocks for a while.

What we’ve been experiencing over the last year is frightening, too. It’s not clear whether the July rally in the stock market was more like an early sucker’s rally in the Volcker era (leading to a recession and bear market) or like the second big rally — the one that became a great bull market. Or, perhaps, it’s another variation.

No one knows. But remember that those long-term bets on stocks and bonds paid off, even in that era of market turmoil.

- Jeff Sommer, New York Times (via Honolulu Star-Advertiser, 8/14/22)

inflation and interest rates

Inflation concerns continue to grip the market.

Some inflation is good. Not too much, but some. As they say, one person's cost increase is another person's profit.

That's why, historically, stocks typically perform well in inflationary environments.

Of course, with inflation just hitting a 40-year high, it's already reached the 'too much' point.

But remember, inflation doesn't tank stocks. High interest rates do.

And while the Fed is expected to raise rates 3-4 times this year, getting to 0.9% by year's end, that would still keep rates at historically low levels.

It's also important to know that over the last 50 years, there's never been a recession (aside from 2020's pandemic-induced plunge), when the Fed Funds rate was under 4%.

And with rates only expected to hit 0.9% by the end of this year, 1.6% by the end of 2023, and 2.1% by the end of 2024, that's a far cry from that 4% level.

So the prospect of 'high' interest rates is literally years and years and years down the road.

And to me, that shows a clear path for strong economic growth for the foreseeable future.

-- Kevin Matras, Weekend Wisdom, February 19, 2022

what are the odds that the stock market will be up this year?

There’s a two-out-of-three chance the U.S. stock market will rise in 2022. A 66% probability of a rising market next year seems downright attractive, given that equities have more than doubled over the past 18 months. What many investors don’t realize is that these market odds stay the same from year to year, regardless of what’s come before.

Investors have a hard time accepting this because they believe the market exhibits trends. They assume that a good year makes it more likely the subsequent year will be rewarding, and a poor year sets up the probability of another disappointing year.

Contrarian investors make a conceptually similar mistake. They think the market regresses to the mean, which would mean that an above-average year would be more likely followed by a below-average year, and vice-versa.

Both investors and contrarians are wrong, because the stock market discounts the future, not the past. As market theoreticians teach us, an efficient market’s level at any given time should reflect all information that is publicly-available. According to Lawrence Tint, the former U.S. CEO of BGI, the organization that created iShares (now part of Blackrock), that means the market will rise or fall according to changes in anticipated future returns. It does “not include history in the calculation,” he said in an interview.

The accompanying chart provides a good illustration of market efficiency. The chart, which is based on the Dow Jones Industrial Average’s DJIA return since its creation in 1896, plots the odds that the Dow will rise in any given year.

... The bottom line: The odds the stock market will rise next year are the same as they would be in any other year.

Your reaction to these statistics will depend on whether you see the glass as half-full or half-empty. If you’re in the former camp, you will celebrate the two-out-of-three odds the market will rise next year, whereas if you’re in the glass-is-half-empty camp you will focus on the one-out-of-three odds of its falling. Regardless, what happens to stocks in 2022 will have nothing to do with how the market has performed this year.

pullbacks and corrections

Stocks closed lower on Friday and for the week. That makes it three weeks in a row.

Rough start to the new year.

The Dow and the S&P remain in 'pullback' territory (-7.27% and -8.73% respectively). And the Nasdaq remains in 'correction' territory (-15.1%).

Pullbacks, which are defined as a decline between -5% and -9.99%, happen on average of 3-4 times a year.

And corrections, which are defined as a decline between -10% and -19.99%, happen roughly once a year.

The Dow and the S&P pulled back 3 times last year. But ultimately gained 18.7% and 26.9% for the year.

The Nasdaq corrected once last year, and finished with a gain of 21.4%.

So what we're seeing right now is not unusual. In fact, pullbacks and corrections are common.

Every bull market has them.

While they're never fun when they're happening, if you know these are commonplace moves, you can instead look at them as opportunities to buy rather than places to sell.

For me, each additional step back means we are getting closer to the pullback/correction being over. Not to mention the opportunity of getting in at even cheaper prices.

And the sooner we can get this over with, the sooner we can get back to the bull market rally.

Kevin Matras

Executive Vice President, Zacks Investment Research

- Profit from the Pros (1/24/22)

Grantham forecasts the market

Renowned investor Jeremy Grantham (Trades, Portfolio) is doubling down on his bubble call, telling CNBC’s Wilfred Frost on Tuesday’s “Closing Bell” that the conditions in the stock market right now are even crazier than the periods leading up to the crashes of 1929 and 2000.

As a result, he cautioned that investors should consider “avoid[ing] the U.S. like the plague.”

“The value stocks outside the U.S. are not too bad,” Grantham said. “They are overpriced, but they are going to return over the next 10 years a positive return. Our forecast in the U.S. is for a negative return over the next seven years…I strongly believe that will be accurate.”

During the interview, the guru, who is one of the co-founders of GMO, also commented on the future of the green energy market as well as despaired over meme stocks, calling them a “travesty of serious investing.”

***

Despite his recent advice to “avoid the U.S. like the plague,” as of the end of the second quarter, GuruFocus portfolio data shows the guru’s five largest holdings were Microsoft Corp. (MSFT, Financial), UnitedHealth Group Inc. (UNH, Financial), Apple Inc. (AAPL, Financial), U.S. Bancorp (USB, Financial) and Oracle Corp. (ORCL, Financial).

Schwab's outlook headed into the election

Outlook:

With Election Day finally arriving on Tuesday (11/3) the market indicators are all over the map, and the only thing that seems certain is lots of market movement. Don your volatility hat and buckle up tight; next week looks like it’s going to be a wild ride.

Bottom Line:

I can’t remember the last time there was such extreme and stark disagreement among the indicators. Of course this is all related to Election Day next Tuesday (11/3).

With no clear consensus and such a wide range of readings, the only logical outlook for next week is Volatile; at least in the first half of the week. Following the election, it is likely that equities will make a big move higher or continue their recent decline. Therefore the secondary outlook is Breakout, because it is impossible to know which direction it may move.

The next 20 years?

"Looking at current 10-year returns gives me a sinking feeling in the pit of my stomach which I have experienced twice before, during the tech bubble and the financial crisis. Is there any data regarding significantly higher 10-year returns being negatively correlated with lower subsequent 10-year returns (like the tech boom followed by the 'lost decade')?"

My initial answer is that there is a loose inverse relationship between past and future 10-year returns, but so loose that one cannot make money off that information. This column provides the figures to defend--or refute--that assertion. In addition to showing the results of 10-year returns, I also examine five- and 20-year periods.

...

One could not hope for a clearer picture than what occurs with the 20-year chart. When blue is up, red is down, and the converse. There are only brief stretches when the two lines appear on the same side of the median, and in those instances the returns are close to normal, so the signal doesn’t flash brightly. The graph looks so clean that one suspects that its author erred. (The thought did initially cross my mind.)

This portrait is dominated by five events:

1. The depression/war years (weak results)
2. The 1950s/1960s (strong)
3. The 1970s oil crisis (weak)
4. The 1980s/1990s (strong)
5. The 2000s (weak, in fact considerably worse than the 1930s)

Consequently, these results not only lack statistical significance, because the 648 monthly observations so thoroughly overlap, but they also fail common sense. That buoyant economies generate optimistic stock valuations, which eventually decline as the economic news worsens, makes sense. But that such events have occurred on a seemingly regular cycle is surely accidental. The pattern’s apparent inevitability is a mirage, based on a tiny sample size. 

That said, I suspect the 20-year numbers offer a fair guide to the future, if not as accurately as their negative 0.84 correlation suggests. (Now that’s a correlation!) Secular economic changes do tend to occur gradually, and investor emotions can overshoot the mark. Although the letter of this finding need not be observed, its spirit deserves some respect.

Which implies good news for the U.S. stock market, as entering 2020 the real 20-year return on equities was a modest 3.85%, well below the historic norm. These days, it has become commonplace to bemoan high stock prices. Perhaps the skeptics will prove to be correct. But 20-year return measure foresees a happier outcome.

-- John Rekenthaler

Election game plan

As if this year hasn't created enough uncertainty for investors, they must now prepare for a presidential election. While the candidates are familiar, the limited debates have prevented the average investor from getting clarity on polices that would affect the market.

The election will dictate where money flows for the next four to possibly eight years. While we can't predict the outcome of the election, it's worthwhile to go over scenarios and expectations so we can position our portfolios accordingly.

To properly prepare - you need to remove your bias!!!

Let's face it, this is a divisive atmosphere and a heated election. To properly approach this topic, we must remove any bias and focus on the markets.

Below I discuss what we should expect before, during and after the election and how to invest and profit in the weeks and months ahead.

The Weeks Before the Election (October 12th-30th)

The three weeks leading up to the election should be a time of caution. Some will be positioning themselves for what they expect might happen, but there will be a lot of investors who will not want to be exposed to the election results. This group would rather sit back and wait and see what happens, rather than taking potentially significant risk this election year.

The 2016 election saw a sell-off in the last two weeks of October before election week. During this time, the S&P shed about 2.5% and volatility spiked, with the VIX moving higher by over 20%. While the betting markets predicted an easy Clinton win, the options markets prepared for uncertainty anyway.

The Day and Night of the Election (November 3rd)

The calm before the storm will come on Monday November 2nd, when traders back away from the action and await the results. Volumes will decrease into Tuesday when we will see rumors start to move the market up and down.

As official results come in, the stock market will be closed and the futures market will be responding to the headlines. The 2016 election result was a shock when Trump won and the news sent the S&P futures into a tailspin. However, it didn't take long for investors to decide they liked Trump, and a big upwards reversal came the next morning.

If Trump wins: Expect a move higher in the futures and into the next day. The market will like Trump's market friendly approach we have seen over the last four years.

If Biden wins: Look for a move lower overnight and the next day as the possibility of higher taxes will be a perceived negative. However, the market might shrug off a Biden win as a massive infrastructure bill would be appealing for short-term growth.

The Days and Weeks After (November and December)

The smart money will position themselves for the next couple years in the weeks that follow the election. In 2016, the S&P moved higher by over 6% from November into the end of the year.

After the election, investors should focus on the stocks that will benefit from winning candidate. Regardless of what the overall market does, favorable sectors will outperform based on that candidate's policies.

If Trump wins: Market continues to rally, but volatility remains high as conflict with China remains.

If Biden wins: Energy and Wall Street struggle, while eco-friendly and tech thrive. Watch for gold to go higher as spending increases.

Wildcard

This election will be close and if there is no clear winner, the market will react negatively. I would expect the VIX to stay elevated as the winner is sorted out and the market to sell off until there is clarity.

In Summary

Investors have seen a lot of uncertainty and volatility this year, so an unpredictable election seems to fit in perfectly. While certain areas of the market might struggle under Biden or Trump, both candidates should be viewed as market friendly. Investors have a win/win scenario with some short-term risks with Biden that would be cancelled out with the volatility of Trump.

Whatever the result, there will be money to be made. Investors should ready themselves and plan for the possibility of both candidates.

-- Jeremy Mullin, Weekend Wisdom, Zacks

Trump vs. Biden: a sector outlook

The election is fast approaching and investors need to ready themselves for some volatility in their portfolios. Biden and Trump have very different views on how the next four years should look for this country. Because of that, certain sectors of the market will respond to a victory from each candidate differently.

While there are positives and negatives for each candidate for the overall market, individual industries will be affected more directly. Below I discuss exactly what to expect from some selected sectors, and how to profit in either situation. But first let's talk about how the markets perceive each candidate.

Who Does the Market Favor?

The market would prefer Trump to any Democratic candidate because of the threat of higher taxes. While Biden is a net negative for investors, he is perceived as less harmful than Bernie Sanders would have been.

Because of Biden's time as Vice President, the market knows what it is getting, which would be similar polices to the Obama Administration. This creates some clarity and calm with investors as opposed to Trump, who has created volatility in the past with his aggression towards China.

At the moment, the polls and betting markets give the edge to Biden. When he moved ahead of Trump, the stock market didn't react negatively. This is a sign that the investors don't have a major preference between the two outcomes. So, while the market might favor Trump slightly, there isn't major favoritism as there would have been with other Democratic nominees.

Sector Outlook: Trump

Let's look at a few sectors likely to perform well if Trump keeps his seat in the Oval Office.

Infrastructure- Materials and industrials will benefit with a stimulus bill on infrastructure. A big deal has been promised for years, but after COVID-19, we are likely to see finally some movement after the election. Trump has been eyeing an $1 trillion infrastructure package that would target roads, bridges and public transport as well as 5G network infrastructure. The stocks that build and supply the materials for these projects with directly benefit.

Energy- Trump would be friendly to the traditional oil companies, encouraging fossil fuel production with less regulation. Big oil could see a big rally in shares with any threat of a Green New Deal off the table.

Financials- Wall Street will benefit with lower taxes and less regulations. While banks have struggled with low interest rates, the market volatility has been good for trading. Assuming the economy comes back and interest rates can tick higher, a second Trump term could be very bullish for the banks.

Consumer Discretionary- A Trump win would mean taxes stay low – and they could possibly even go lower if Trump gets his desired middle-class tax cut of 10%. A cut of that size would put more income in people's pockets, which would be good for the consumer staples and discretionary sectors. Think retail and discount retail stores as beneficiaries that would thrive with more cash in the pockets of the American consumer.

Sector Outlook: Biden

Now, let's explore sectors likely to benefit from a Biden victory in November.

Infrastructure- Biden has even bigger ambitions on stimulus than Trump, aiming for $2 trillion of investment in his first term. Roads and bridges are of course on the agenda, but Biden will also focus on green spaces, water systems, electricity grids and broadband. A Biden presidency would have a focus on climate change, which brings us to our next sector.

Energy- Big oil is in trouble with a Biden win. Energy would see more regulations and a movement towards greener industries to modernize the economy to combat climate change. Think solar power under Biden.

Tech- The Trump admiration has been talking about rolling back protections for big tech. Additionally, Trump has had issues with tech platforms control of content, which has caused a conflict that could be an issue for big companies like Amazon, Facebook and Twitter.

While a Biden win might throw a wrench in the tech momentum due to tax concerns, the break-up threat wouldn't be there. Additionally, improved relationship with China could help tech companies that have exposure to Chinese markets.

Gold- The amount of spending that is likely to come under Biden will bring the gold bugs out like never before. Not only will we get a big infrastructure bill, but the pandemic has set a precedent for the government to spend.

How to Capitalize

The next president will have a lot on his plate with an economy trying to recover in the midst of a pandemic. Both Biden and Trump have different views on key economic issues, especially tax policy and energy. The one thing they agree on is infrastructure; it's just how much we need to spend that is the difference.

Investors should map out a clear path and strategy to put in place the days and weeks after the election. The next president's plans will shift trillions of dollars around the economy and certain stocks will reward investors that get in early.

-- advertising email from Zacks

***

What about health care?

The 2020 Presidential election

Key takeaways

• Expect short-term stock market volatility as the election heats up. But longer term, economic fundamentals are likely more important drivers for stocks than who wins the White House.
• A Biden presidency could mean more economic stimulus than a Trump second term, but also higher taxes on businesses, higher income people, and capital gains.
• While President Trump has focused on deregulation, a Biden administration would likely re-regulate certain industries. Among the possible targets: Fossil fuels, financial services, health care, and big tech.
• Stock buybacks have been a significant source of returns for stock investors over the past decade. Democrats could move to limit them, while Republicans would likely support the status quo.

Elections matter to all of us, as citizens and as investors. US presidential election results drive policies that help shape our economy, the markets, and our lives. So it’s important to think about what the outcome could mean to your wallet.

And it's not just the presidential election that matters. Since much of a president's agenda requires congressional approval, the outcome of the congressional races is also key. Indeed, this time around, control of the Senate may be the key to enacting the next president's agenda.

The political outlook

At this early stage in the 2020 campaign, there is plenty of time for surprises to alter the course of history—particularly given the fact that this election is taking place in the midst of a global pandemic that has hit America hard. Still, it's worth considering a range of possible election outcomes. Here we look at 3 of the most likely scenarios—and the potential financial implications of each.

President Trump wins a second term and Congress remains split between a Democratic House and a Republican Senate

The Democrats sweep the White House and Congress

Former Vice President Joe Biden wins the presidency, but the Republicans hold the Senate

Scenario 1 is a continuation of the status quo. Scenario 2 likely brings re-regulation of some industries, higher taxes on corporations, upper-income individuals, and investors and more fiscal stimulus than in Scenario 1. In scenario 3, changes to tax and spending policy are likely muted by a GOP Senate.

Let's dig into some details.

The economy

No matter who is elected next year, the economy will likely still be recovering from recession and hardly at full throttle. So fiscal policy—federal taxes and spending—is likely to be key to economic growth.

"The 2020 multi-trillion-dollar fiscal spending package has been a major factor that's kept this economic environment from getting worse, along with the Fed's monetary stimulus," says Dirk Hofschire, Fidelity senior vice president of asset allocation. "But there is a risk, as we go forward, if the economy is not gaining significant traction and you still have large parts of the economy operating at limited capacity, that we're still going to need a lot of fiscal support."

Biden has proposed a combination of more federal spending and a redistribution of the tax burden from middle income taxpayers to corporations, high-income taxpayers, and investors. Hofschire says that's likely to mean more short-term fiscal stimulus under a Democratic presidency than a Republican one, particularly in a Democratic sweep.

"The tone of the Democratic fiscal plan would also be more likely to try to address growing income inequality and provide more spending and/or tax breaks geared to lower- and middle-income households," says Hofschire. "Because lower-income households tend to spend most of their income gains, this might be helpful consumer stimulus if the economic recovery is still struggling to regain traction."

But Hofschire speculates that a Biden tax plan, all other things being equal, would probably be "somewhat worse for the corporate profit outlook" than a Trump second term, and could fuel inflation longer term.

Taxes

During the Trump administration, federal tax rates on corporate and individual income and capital gains came down dramatically. The president has spoken of further cuts in a second term, but with a Democratic House that could be difficult to achieve. A more likely scenario is a continuation of current tax rates.

By contrast, Biden has proposed increasing the top tax rate for corporations to 28% from 21%, and for individuals to 39.6% from 37% while treating capital gains and dividends, now taxed at a top rate of 20%, as ordinary income.

Increases in corporate tax rates would be a hit to earnings, which are one driver of stock prices (though not the only one). But historically, rising corporate and individual tax rates have not meant falling stock prices, Fidelity sector strategist and market historian Denise Chisholm notes. In the 13 previous instances of tax increases since 1950, the S&P 500, the stock index that tracks most of the major companies in the US, has shown higher average returns, and higher odds of an advance, in times when taxes are increasing, according to Chisholm's research.*

This holds true even when you drill down into key sectors of the S&P 500. "Economically sensitive sectors, like consumer discretionary, oddly have done better on average during years taxes increase. These counterintuitive odds suggest something else is going on—the market either discounts it in advance or the economy has received stimulus to offset it," says Chisholm.

Of course, if you are facing rising individual rates, you will want to consider strategies to minimize the impact on your bottom line. In addition to higher federal tax rates on income and investment gains, Fidelity's head of government relations and public policy Jim Febeo notes that the Biden campaign has talked about rethinking retirement savings tax incentives to promote more equality among different income levels. That could include reduction in the tax deduction for IRAs and 401(k)s, at least for upper-income people.

"With the fiscal situation where it is, all sources of potential revenue could be on the table," says Febeo.

It's always a good idea to take advantage of tax-preferred retirement savings opportunities, but that may be particularly true this year, given the potential focus on tax increases under a Democratic regime. Other strategies to consider if you are concerned about tax rates rising: taking some capital gains, or converting a portion of your traditional 401(k) or IRA savings to a Roth.

Stocks

For the overall stock market, there are pluses and minuses under all 3 election scenarios. With Biden, you'd likely have more fiscal stimulus but higher taxes on corporations and higher earners. That could include higher taxes on capital gains and disincentives for share buybacks, which have helped drive stock valuations higher in the US than other countries. With Trump, you'd likely see lower taxes but less stimulus and a more confrontational approach to US-China relations, which has unsettled markets in the past.

That makes it difficult to say which administration would be better for stocks. Says Jurrien Timmer, Fidelity's director of global macro: "It's my personal sense that the 2020 election will have less impact on the markets than some suggest. Ultimately, it's the long wave of economic fundamentals that drives the markets beyond any one election or any one party."

Still, in the near term, there would likely be different winners and losers under a Republican versus a Democratic regime, due to very different regulatory approaches.

The Trump administration ushered in a period of deregulation. One major winner was the oil and gas industry, which benefited from less stringent environmental regulations. "The Biden administration would likely go in the exact opposite direction, rolling many of those executive orders back and pushing for more clean energy," says Hofschire.

Other sectors that could come under heightened scrutiny in a Democratic administration include health care, financial services, and big tech. Says Timmer: "The 5 FANG stocks (Facebook, Amazon, Apple, Netflix, and Google) are 20% of the US stock market and are actually pulling the market higher right now. If they stop pulling, the market may stop going up, so that's yet another dimension to the puzzle."

Trade

On the trade front, the differences between the candidates may be more stylistic than substantive. "The tactics and tone of the US-China relationship might change," says Hofschire.

"Trump often takes a confrontational tone on social media. Biden is probably a much more conventional politician in regard to trade and foreign policy and would be more likely to build multilateral coalitions to try to influence China. However, there is a broad, bipartisan consensus to get tough on China, so any future policies are likely to continue to ramp up export controls, restrictions on investment, and other decoupling activities that deepen deglobalization pressures," Hofschire says. Among them: Incentives to bring back key links in the industrial supply chain to the US or at least diversify out of China.

Interest rates

Regardless of the election, interest rates are likely to stay low for a long time—so it's a good time for borrowers. Says Beau Coash, institutional portfolio manager in the fixed income division: "Given that the Fed is going to keep buying and supporting the bond market, it's hard to see interest rates going up anytime soon—probably not before we get back to a fully open economy."

If you are considering buying a home or refinancing, now is a great time to comparison shop. If you have a large portion of your portfolio in cash or low-yielding bonds, it might be a good time to meet with an advisor to discuss a long-term investment strategy with a combination of stocks for growth potential and high-quality bonds for wealth preservation.

Health care

Trump is opposed to the Affordable Care Act, the health care system put in place under the Obama administration. The Trump administration has brought a lawsuit against it all the way to the Supreme Court. Meanwhile, Biden has talked about enhancing the Affordable Care Act. So far, however, the details of their future plans are faint. So, we will need to wait and see how those plans take shape.

Biden has also spoken about extending Medicare eligibility to unemployed people 60 and over. If enacted, this may offer an interesting opportunity for people considering early retirement—or forced into it. Since health care costs are often a key reason people can't afford to retire early, Medicare could help solve that problem, and potentially enable people to postpone Social Security to their full retirement age or later, capturing higher monthly benefits.

What's ahead?

Given the pandemic, passions surrounding this election, and uncertainty about how and when the election results may be resolved, it would not be surprising if markets got volatile.

"There's a reasonable probability that we won't know the outcome of the election for at least a few days and maybe a few weeks after the election," says Hofschire. "The pandemic is creating huge logistical challenges for the electoral process, making in-person voting more difficult and causing delays in counting due to the high volume of mail-in ballots. Unfortunately, the highly polarized partisan atmosphere isn't making this situation any better. The futures markets are pricing in rising stock-market volatility moving into the elections, and I expect a messy or prolonged aftermath could extend that volatility into December and maybe even January."

*** [posted 8/30/20] ***

On the income tax side, Biden calls for raising the top individual income tax rate to 39.6% from 37%, and applying it to taxpayers with taxable income over $400,000, according to an analysis from the Tax Policy Center.

He’s also talking about an increase to payroll taxes. Biden would apply the 12.4% portion of the Social Security tax — which is normally shared by both the employee and employer — to earnings over $400,000, the Tax Policy Center found.

Currently, the Social Security tax is subject to a wage cap of $137,700 and is adjusted annually.

Finally, Biden would also boost rates on long-term capital gains and qualified dividends to 39.6% — the same top rate as ordinary income — for those with income over $1 million, according to theTax Foundation.

Currently, the long-term capital gains tax rate is 20% for single households with more than $441,451 in taxable income ($496,601 for married-filing-jointly) in 2020.

Black Turkeys

The circumstances of the 2020 market crash might be unique to the coronavirus pandemic, but they lead investors to wonder: Are such drops normal for equity markets, or is this different?

During the global financial crisis of 2007–09, some observers described the events that unfolded as a “black swan,” meaning a unique negative event that couldn’t be foreseen because nothing similar had happened before. But the data I’d seen from Ibbotson Associates, a firm that specialized in collecting historical market returns (and which Morningstar acquired in 2006 and merged into Morningstar Investment Management LLC in 2016), demonstrated a long history of market crashes. Some ended up being part of a larger financial crisis.

So, if these “black swan events” happen somewhat regularly—too frequently to render them true black swan events—then what are they? They’re more like “black turkeys,” according to Laurence B. Siegel, the first employee of Ibbotson Associates and now director of research for the CFA Institute Research Foundation. In a 2010 article for the Financial Analysts Journal, he described a black turkey as “an event that is everywhere in the data—it happens all the time—but to which one is willfully blind.”

Here, I take a look at past market declines to see how the coronavirus-caused market crisis compares.

Shilling says...

Stocks could be poised for a big drop similar to the market’s decline during the Great Depression, according to financial analyst Gary Shilling.

In a CNBC interview, Shilling said the stock market could plunge between 30-40% over the next year as investors realize the economic recovery from the coronavirus recession could take longer than expected.

“I think we’ve got a second leg down and that’s very much reminiscent of what happened in the 1930s where people appreciate the depth of this recession and the disruption and how long it’s going to take to recover,” he said.

The S&P 500 plunged in February and early March as the coronavirus pandemic spread across the U.S., forcing businesses to shut down and lay off workers. Since mid-March, the index has rebounded roughly 40% as investors have become optimistic about the gradual reopening of the economy and policymakers have injected trillions of dollars of economic stimulus into the financial system.

Early economic data has bolstered the case for a V-shaped recovery, where the economy bounces back quickly from a steep downturn, yet some investors are still cautious as the number of coronaviruses cases in the U.S. continues to rise. Many Americans have missed out on the recent market rally, with record-high levels of cash sitting on the sidelines.

Shilling said the S&P 500′s comeback resembles its rebound in 1929, when stocks rallied after an initial crash. He warned history could repeat itself with the S&P 500 poised to tumble again like it did in the early 1930s after the severity of the Great Depression became clear.

“Stocks are [behaving] very much like that rebound in 1929 where there is absolute conviction that the virus will be under control and that massive monetary and fiscal stimuli will reinvigorate the economy,” he said.

Shilling, who is the author of several books including “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation,” said the coronavirus pandemic will force consumers to remain more cautious about spending in the coming years.

“I think we’re going to see downward pressure on prices and that works to the advantage of Treasury bonds, which have been my favorite since 1981,” he said.

economy forecast - 2024

The Morningstar US Market Index has come thundering back since its late March nadir and is now down merely 7% year to date, even as the coronavirus pandemic persists. While many investors are wondering if the market is exhibiting irrational exuberance, we think the rebound has been broadly warranted, as we forecast a strong long-run recovery in the U.S. economy. We expect U.S. GDP to drop 5.1% in 2020 but surge back in 2021 and experience further catch-up growth in following years. By 2024, we think U.S. GDP will recover to just 1% below our expectations before the pandemic.