Is the Party Over?
Markets usually soften just after a new President takes the helm but based on an unpredictable 2016, anything is possible in 2017.
By Michael Kahn
To be sure, we’ve seen such mantras as “sell in May and go away” fail before, yet we still keep coming back to them as Delphian predictors.
This past year kicked off with a decline in the first week of January and a decline for the month as a whole. That led the “January barometer” to forecast a “not great year.” The theory says that “as January goes, so goes the year.”
Unfortunately, it is really only a strong January that predicts a strong year while a weak January is so-so at forecasting. The year that is now ending has seen the Dow Jones Industrial Average currently up 14% and that is near or above average, depending on how one determines what “average” actually means. In other words, the weak January predicted anything other than a strong year.
The annual stock-market cycle we call “sell in May” also did not fare well unless you count sleepless nights avoided. The Dow gained about 2% from the open on May 2 through the close in October, albeit with a few bouts of volatility.
Indeed, I wrote a column about this cycle last year where I said this cherished mantra “has gone the way of the dodo bird.”
This brings us to the Presidential cycle. Without any consideration to the specific occupant of the White House, the stock market seems to perform differently in different years of any President’s term. For Presidents in their final year we might see policies that try to goose the economy to keep the occupant and/or the occupant’s party in power. And for the first year of new Presidents, we might see the market suffer as tough new policies are enacted.
Tom McClellan, editor of the McClellan Market Report, actually breaks it down further by isolating first- and second-term presidencies.
According to his analysis, the final year of a two-term President is usually flat to down, and here is the key phrase: “on average” (see Chart 1). Cycle analysis does not guarantee any specific performance but over time it captures a tendency.
Standard & Poor’s 500
Up until the election, most of the year was indeed spent moving sideways to lower, in accordance to the model. Then the pent-up energy of certainty and new hope was released.
Where do the cycles point for 2017? McClellan’s work pointed to the strong rally for the new President from a new party from the election through the end of the year. However, it looks for a soft first quarter. McClellan joked that when the new President has been in office for a whole week and has not solved all the country’s problems, investors get disenchanted.
After that, it looks for a resumption of the rally in the second quarter but in the third quarter things go a bit awry.
Just to be sure, I verified this with the work of Larry Williams, veteran trader, author and proprietor of Ireallytrade.com. Williams puts out annual forecasts based on many different cycles and also looks at the first term of a new President.
He also sees a soft first quarter followed by a strong rally into the middle of the second quarter.
From there, investors might want to pull back and sit on more cash.
Both of these cycles forecasts leave open the possibility for a run at 21,000 on the Dow as I suggested earlier this month.
The question is will these cycles work at all with a new President who is unlike any that came before him.
Certainty, the stock market reacted positively after the election as uncertainty was removed. But were all of the gains to be attributed to the first half year of the new administration already made so that the market will not follow the average path?
Considering that most other market patterns did not do what they were supposed to do it might be a hard to believe these cycles. But since there is no crystal ball we have to take the evidence the market gives us – which are cycles that are still working over recent memory – and stick with them.
Indeed, it is a brave new world in stock-market investing where the rules are changing and we need to adapt by following along, not hanging on, old saws.
Economists versus the Economy
LONDON – Let’s be honest: no one knows what is happening in the world economy today.
Credit Eric Thayer for The New York Times
The Trump Matrix
On policy, much of his cabinet falls closer to the conventional conservative end, with appointees like Tom Price and Betsy DeVos and Rick Perry who would be at home in a Ted Cruz or Marco Rubio or even Jeb! administration.
A bailout of Monte dei Paschi is not enough
So long as structural problems fester, more rescues will be needed
A bailout of at least €5bn is needed, and soon. Depositors have been pulling money out of the bank all year and the pace of the flight picked up this month. Efforts to raise the money from private sources fell short by half, leaving the state little choice but to propose a bailout.
Under the Italian proposal, MPS shareholders will be wiped out. Institutional holders of the junior bonds will be converted into equity owners, implying that they will lose the lion’s share of their capital. Retail holders of the junior bonds will be compensated with grants of senior bonds.
Depositors will be protected. The state will put in capital — of an amount still to be determined — and provide emergency liquidity as needed, receiving full control of the bank in return.
The Italian authorities may be keen to inject as much capital as they can under European rules.
The key to any bank restructuring is to create a strong sense of finality. The impression that more capital might be needed increases the chance that it will be. Indeed, a muscular state contribution makes sense at this point. True finality, however, will remain out of reach as long as the underlying problems of Italian banking go unsolved.
Italy has too many banks and too many bank branches, which has led to chronic unprofitability. Costs need to be taken out and headcounts cut. Failing banks need to be shut.
Consolidation has barely begun. Along the way, a robust market for impaired assets must be developed. This may require more aggressive markdowns than have occurred to this point.
Finally, governance at small- and medium-sized banks needs to be made stronger and more transparent. Bank boards, local governments and local businesses are too closely intertwined.
Too many people serve on the boards of multiple banks. And the judicial system needs reform so it can handle bankruptcies more efficiently.
This will be slow, painful and politically sensitive work. All the more reason to start now. Given the persistent sluggishness of Italy’s economy, banks will continue to require periodic state bailouts if they cannot be run profitably. It is time to move from preventing crises to solving the problem.
Investing in Our Furry Friends
By Patrick Watson
Photo: Getty Images
Photo: Getty Images
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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