Transcript Hunt Chapters 17, 18, 19

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Few presidents are re-elected during recessions
Incumbents are most likely to be re-elected
during late Revival or Acceleration, to lose during
Maturation, Ease-off, and Plunge
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1960 – Kennedy defeated Nixon
1980 – Reagan defeated Carter
1992 – Clinton defeated Bush
Recessions rarely occur during a presidential
election year
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Stocks fare well during presidential election
years
Three principles:
 Be optimistic on stocks and bonds if you are sure the
economy is not in advanced Acceleration or
Maturation
 Be objective about the election’s economic impact
 Remember that significant investment moves are risky
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Long-term rates tend to be stable – the Fed tries to
keep interest rates steady around elections
Short-term rates rise modestly
Investment moves during presidential election years:
 Plunge or Revival – follow normal course, investment
confidence
 Ease-off – move into bonds and stocks earlier if you are a
risk taker
 Acceleration or Maturation – be confident about trading
plays if you are aggressive or high rolling
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Historical record:
 In the 9 presidential elections from 1952 to 1984, Treasury
note yields rose 3 times, fell 3 times, and remained about
the same 3 times
 Average fall – 37 points
 Average rise – 95 points
 3-month Treasury bills rose 6 times, 3 were significant
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Relying solely on election returns could lead to very
poor investment returns about one-third of the time
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Tend to rise
Predictable: rose during every election year from
1952 to 1984 except for 1960
Investment moves:
 Aggressive – invest additional 5% in stocks
 High roller – invest additional 10% in stocks
 Conservative – no additional investment
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Presidents set the tone for the markets
Pro-business presidents produce the best stock
and bond market performance
Presidents with more government involvement
produce better performance for speculative
vehicles
Percent Change in the S&P 500*
Total
Monthly
Monthly Ranking
Eisenhower
Up
118.5
1.2
2
Reagan
Up
45.5
0.8
3
Ford
Up
36.8
1.3
1
Johnson
Up
32.2
0.4
4
Kennedy
Up
13.2
0.4
4
Carter
Down
15.4
0.3
5
Nixon
Down
65.1
1.0
6
*Adjusted for inflation
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Money market yields: measured by the 3-month
Treasury bill, show same pattern as long-term yields
Misery Index – sums unemployment rate and
inflation
Effective federal tax rate on family income ultraversion of the misery index
Eisenhower has lowest average ultramisery index,
Reagan has greatest improvement
President
Average Index
Rank
Harry Truman
7.87
5
Dwight Eisenhower
6.26
1
John Kennedy
7.27
3
Lyndon Johnson
6.78
2
Richard Nixon
9.98
7
Gerald Ford
15.93
10
Jimmy Carter
16.27
11
Ronald Reagan
12.19
9
George H. W. Bush
10.68
8
Bill Clinton
7.80
4
George W. Bush
7.98
6
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Economic views – pro-growth and anti-inflation
should have a positive impact on the economy
World opinion
Selection of Vice President
Sense of humor
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Long-term solutions rather than short-term
quick fixes
Control the federal budget deficit
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Prices improve in response to major peak &
decline of interest rates
After rally is under way, it is later reinforced by an
economic upturn
Since 1950’s
 Stocks turned up on average of 4 months before each
recovery
 Stocks fell on average 10 months prior to economic
downturn
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Stock market sells off when rates rise or
indicators suggest they will soon
However stocks will not act negatively when
rates are rising slower than inflation and
economic activity is strong
Lower rates boost stocks unless business activity
is very weak or rates are declining slower than
inflation
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Rising inflation is bad for stocks when interest
rates are rising at a faster rate
Disinflation is bullish for stocks except when
rates are falling slower
Metal and commodity stock prices respond
positively to inflation
While retail, food, etc. stocks decline
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React mainly on a short term basis
 Stocks tend to react the greatest to industrial
production, retail sales, payroll employment, GNP,
durable goods orders, and the Index of Leading
Economic Indicators
 To a lesser degree housing starts, building permits,
construction spending, agricultural prices and other
more specific industry indicators
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Bonds dislike accelerating inflation and welcome
slower inflation
PPI Index gets the most attention from bond
markets
Bonds yields tend to rise when MS growth
accelerates and fall when MS growth decelerates
As the economy become more sluggish, bond
reactions become increasing positive
As a result bonds perform best late in a recession
and early in a recovery
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Gold is very profitable during persistent rises in
inflation and can be a profitable alternative during
times when stocks and bonds perform poorly
Best time to buy is when economic conditions are
strengthening during acceleration and maturation
Rallies tend to be long and are intensified by sharp
oil price increases
Recessions are time to watch from being caught in a
gold market trap, as gold has very brief rallies that
are followed with dramatic drop-offs.
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Inverted yield curve does not foretell a recession
 YC may remain inverted for a long time before a recession
begins
 Recessions have begun without YC inversion
 Inverted YC have not always led to recession
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Steepening of the YC indicated the economy will
strengthen, inflation will heat up and the next move
in rates will be up
Economic life cycle can be seriously disrupted but is
very unlikely to be repeated, took place during
Carter’s credit controls of 1980
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Puts upward pressure on interest rates and inflation
Deficit is inflationary
 Increased government spending does not increase the
supply of consumer goods
 Budget financing methods often lead to faster MS growth
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Deficits are negative only when the economy is
strong
 During acceleration and maturation, upward pressured on
rates and inflation is aggravated by the deficit even if it is
shrinking
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Balanced budget would help the economy
Deficit reduction would lead to higher
investment in both capital equipment and
housing, and other economic benefits
As financial markets knowing well in advance
what was to come, would lower rates before the
pain caused by lower government spending
Will the budget ever be balanced?
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The most predictable quality of the economy is its volatility
Official actions by the government don’t usually solve
economic problems
Focusing on a single investment vehicle or indicator is
asking for trouble
Rosy economic conditions do not always provide the best
investment environment
No two economic cycles are alike
The U.S. economy is not an island
The long view works
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Once you have established a set of beliefs that
work, stay with them
Do not take any risk so big it makes you
uncomfortable, stick with your beliefs & limits
When in doubt, depend on your own experience
not on the advice of others