Political opinion polls are fast becoming a laughing stock; flipping a coin rarely proves much better at the game of predicting political outcomes. There is, however, one tried and tested way which has an almost 90% success rate in guessing who the president will be: the economy.
The More People Involved in The Prediction-Making Process, The More Accurate It Is
One of the main arguments for free market capitalism versus a centrally planned economy is that the aggregated decisions of millions of people are much wiser than those of political elites.
This logic seems to be at play when we consider that the stock market performance of the S&P 500, the largest and most significant companies in the US today, has predicted all of the last 22 US Presidential elections, bar three.
Time and time again, the economy comes out as the most important issue to voters.
The Logic Behind This Phenomena
Now, hold your horses.
This isn’t black magic or a sinister corporate conspiracy.
It is actually very logical and just goes to show how the economy is king when it comes to decision making.
Strategas Research Partners have looked into this.
Daniel Clifton, head of policy research, explains that it is simply the case that a strong economy causes people to be contented with the incumbent party, meaning they vote them in again.
In the period from August 8 to November 8 (the date of the election), if the stock values of the S&P 500 rise, the incumbent party (the Democrats) will be re-elected.
Should they fall, this last minute weak performance proves enough to push people over to elect the opposition, in this case, Mr. Trump.
Investors Get Cold Feet; Incumbent Sees Defeat
The possibility of a change in regime also provides a feeling of insecurity, and we all know how much shareholders and investors abhor that.
Thus, they will be more likely to play it safe and reduce activity if they perceive a new government on the horizon.
While people’s perceptions and reality might not always align, it is the aggregated activity of everyone that proves remarkably astute in predicting the change in the wind coming.
So, the economy weakens.
Investors get scared and pull out, or save rather than spend.
Economy further weakens.
Each factor compounds the other. Get it?
Third Term? The Theory Holds Firm
Research shows that this trend is even more apparent when a political party is re-elected for a third term.
The last two times this has occurred, the S&P 500 stock market has seen a huge rally in the last few months before the election.
This makes sense.
For a third term, a political party would need strong economic performance to justify their re-election, as after eight years, a president and party have done more than enough to piss off a lot of people.
That’s just part and parcel of being in power.
Strategas’ research has found that in ‘open’ election years, where a president has finished their eight-year tenure, and so there is no incumbent president, the stock markets have fared worse.
Below is a graph showing how turbulent the stock market is when a new president needs to be elected, compared to averages from all elections years and all calendar years.
This effect is amplified in the months leading up to the election.
Stocks don’t fare so poorly in re-election years and non-Presidential election years.
The political climate around a re-election is usually a lot calmer as you know what you are getting with a re-election.
Recent lessons from across the channel
The UK elections in 2010 and 2015 were determined almost entirely by the economy.
In 2010 the UK was in a deep financial crisis and thus Labor were defeated for the first time in 13 years.
Then, as the Conservatives defended their office in 2015, the high economic growth that year proved enough to push through a majority despite them faring poorly in all the opinion polls and a strong lack of popular political clout.
With the coming election the most unpredictable yet, with polls and betting odds all over the place, the economy may well prove to be the best indicator we have available.
Additionally, with Brexit a distinct possibility, global, and thus US markets will be even more insecure.
The UK is the fifth largest economy in the world, and the uncertainty surrounding its trading future will cause havoc.
However, that doesn’t necessarily mean weak performance by the markets, it will simply be anything but predictable. Keep your eye out for the general trend and you could find yourself one step ahead of others in the political guessing game.
Here’s Why The ‘Cockroach Portfolio’ Is Gaining Popularity
Ray Dalio, the founder of Bridgewater Capital, calls it the “all-weather portfolio” and it’s helped his investment management firm amass roughly $140 billion in assets.
Former Libertarian presidential candidate Harry Browne called it his “fail-safe investing” portfolio. Additionally, It just had its best three-month return ever. It returned 18%, far exceeding its average annual return of 7%.
Browne’s investing philosophy was that when times are good, stocks do well. Meanwhile, bad times are good for Treasury bonds, and gold does well during stagflation. Also, cash is king during a recession or crisis.
Since we don’t know what the future holds, Browne advocated for putting 25% of your portfolio into each asset class. He also suggests being prepared for whatever comes. With bonds, gold, and Treasury’s in your portfolio, you’ll underperform during a bull market. However, you can more than make up for it by softening the blow during a down market.
The “Cockroach” Portfolio
Back in 2012, Dylan Grice, a former strategist with SG Securities, called that type “the cockroach” portfolio. He dubbed it as such due to its ability to survive anything thrown at it.
“What I like best about cockroaches,” wrote Grice, “isn’t just their physical hardiness, it’s the simple algorithm they use to survive. According to Richard Bookstaber, that algorithm is ‘singularly simple and seemingly suboptimal: it moves in the opposite direction of gusts of wind that might signal an approaching predator.’ And that’s it. Simple, suboptimal, but spectacularly robust.”
Grice has calculated that for long-term investors, this type of portfolio has done at least as well as the traditional 60/40 stock and bond mix since the early 1970s. But most importantly, it managed to avoid any massive drawdowns.
And just like cockroaches, your first job is surviving as an investor, says Groce, while prospering is job number two.
A Similar Approach
Fortunately for investors who are looking for this type of portfolio, an ETF has recently launched that follows the same approach as the “cockroach” portfolio.
It’s called The Advanced Research Investment Solutions Risk Parity ETF (RPAR) and was launched last November. Alex Shahidi, the managing partner and co-chief investment officer, says they’re up to $620 million in assets so far.
He says the ETF has returned 12% so far this year compared to 1% for the S&P 500.
Most importantly, during the crash in March it fell just 15%, less than half of the drop in the S&P 500.
According to Shahidi, the fund is 25% stocks, 15% industrial commodities, 17.5% gold, 20% long-dated Treasury inflation-protected securities and 42% long-term Treasury bonds. Total exposure to the market is 120%, because the fund is 20% leveraged.
The stock mix is half U.S. and half overseas stocks, with the overseas portion tilted toward high volatility emerging markets.
Nobody knows what the market will do next, so Shahidi says you want to be prepared for any outcome. “You want to be diversified to (different) economic environments,” he added.
He did say that “If I had to pick an asset class for the next 10 years, it would be gold.”
How To Buy Gold For Your Investment Portfolio – Part 2
Yesterday was part one of buying gold and silver coins for your investment portfolio. With gold and silver both on a hot streak, investors are looking for the fastest way to gain exposure to and buy precious metals. You must be prudent and exercise caution so you don’t make a mistake and find yourself with a bad investment.
Do: Buy Gold With Your Savings
Don’t borrow money to buy gold. Use your savings so when you take possession of your gold, it’s yours without any claims against it. With volatile gold prices, you don’t want to be paying back a loan on your gold if the price suddenly dips.
Don’t: Buy Gold With Credit
The current financial system is built on fiat currency and debt with dollars being printed out of thin air. The reason to own gold is the opposite of that. So to purchase gold by using the system it is protecting against defeats the purpose of owning gold. Just use your savings and own your gold outright from day one.
Do: Store Coin Nearby
If a crisis hits and you need access to your gold, you don’t want to be out in public trying to retrieve your gold. So whether it’s in a small safe hidden in your house or buried in your yard, keep your gold nearby for easy access.
Don’t: Store Coins In a Safety Deposit Box
Storing your gold at a bank sounds like a safe decision. But it’s a bad idea for a few reasons. The first is that if there were ever a crisis, you have to go to the bank to retrieve your gold. That assumes the banks will be open during a crisis. Then you have to get access to your safety deposit box, retrieve your coins and safely get them home. That’s a lot of things that need to go right during a crisis. Additionally, gold has been confiscated before. Here in the US, gold was confiscated in 1933 under Franklin Roosevelt. If it were to happen again, gold stored at home, where there is no record if it, is much safer.
Do: Only Invest With Money You Don’t Need For Awhile
Nobody knows when inflation will hit, or the dollar will collapse, or when gold prices will finally take off. But we aren’t trying to time any of those occurrences. The reason to own gold is a long term store of value. So you don’t want to speculate in gold. We could see prices move higher or significantly lower. But long term, history has shown that gold prices steadily march higher as the dollar steadily declines in value. So when buying gold, make sure it’s with money that you don’t need in an emergency. We suggest using savings or other funds that you don’t need to worry about getting access to for at least five years.
If you have any more questions about investing in gold, find a reputable gold coin dealer near you. They will be glad to answer questions.
Tech Companies Report Record Earnings, See $200 Billion Added To Market Cap
A day after their CEO’s spent five-and-a-half-hour-long testifying at a congressional hearing on anticompetitive practices, four of the largest tech companies in the world grew even larger after each reported strong earnings in the second quarter.
Yesterday alone, Apple, Amazon, Alphabet (Google’s parent company) and Facebook added about $200 billion to their cumulative market cap after they announced earnings. This shows just how dominant each business is. Combined the companies are now valued at more than $5 trillion.
Apple reported more than $11 billion in earnings despite shutting down most of their retail stores during the pandemic. On the earnings call the tech company reported strong demand for the smaller, lower-cost iPhone 11. It also reported a surge in sales for the iPad and Mac products.
“Mac and iPad, these are productivity tools that people are using to stay engaged with their work or stay engaged with their schoolwork,” Apple Chief Executive Tim Cook said during the call. “And we believe we’re going to have a strong back-to-school season sitting here today, it certainly looks like that.”
The company also surprised analysts during the call by announcing a 4-for-1 stock split. Investors who currently have shares will receive three additional shares for every one they own. The share price is also adjusted down to roughly 25% of the current price, helping to make shares more affordable.
Tens of millions of Americans stuck at home during the shelter-at-home restrictions. With this, Amazon was perhaps the biggest winner and reported a record net income last quarter. On the earnings call, Chief Financial Officer Brian Olsavsky said that online grocery sales had tripled in the quarter and video streaming had doubled from a year ago. The company also saw an increase in its cloud computing business.
Alphabet reported earnings and net income in line with expectations. However, it announced the tech company’s first-ever drop in revenue for display ads on Google.
“The macroeconomic environment costs by the pandemic created headwinds for our business,” Alphabet CEO Sundar Pichai said on the call, but said that indications in the third quarter are a stabilization in users and expectations are for revenue to return as well. “This was true across most of our advertising verticals and geographies. Of course, the economic climate remains fragile.”
Facebook, though, had the biggest after-hours jump in its stock price after it beat Wall Street expectations by topping $5 billion in quarterly profit. Also, Facebook said that its traffic grew during the pandemic, with more people at home online, but that the average price per ad declined due to the economic fallout of COVID-19.
“Facebook has been a lifeline of economic activity,” said Chief Financial Officer David Wehner on the earnings call. Also, the company announced $5 billion in quarterly profit.
It said that with more people at home all day due to the pandemic site traffic grew, but like Alphabet, saw a decrease in the average price per ad due to the economic fallout of COVID-19.
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