As the outcome of the race for U.S. President becomes clearer, it is interesting to review the past for rates of return on the S&P 500 index under different political parties. The last 50 years were used to derive the following stats. They represent annual total returns for the stock market as measured by the S&P 500 Index.
Democrat President and a Republican-led Congress: 18%
Republican President and a Democrat-led Congress: 4.5%
The White House and Congress controlled by the same political party: 11.9%
When the House and the Senate were controlled by different parties (regardless of which party is in the White House): 2%
Disclosure note: The above rates of return represent total return which adds the dividend on the stocks in the index to the change in value of the stock index. The S&P 500 index is comprised of 500 stocks and is market cap weighted (each stock weighting within the index is dependent upon the market value of the stock).
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is A- (very favorable). Favorable activity in the housing market continues to support growth in the level of spending.
THE FED AND ITS POLICIES: This factor is rated A (very favorable). Economic reports indicate the U.S. economy is improving.
BUSINESS PROFITABILITY: This factor’s grade is aC-(below average). So far this quarterly reporting period, quarterly profits are slightly ahead of expectations but down from the prior period. Looking ahead, comparable profits will be easier to beat, on average, because lower energy sector profits are in the base period. This factor’s grade may be increased after more data becomes available.
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 4. These risks deserve our ongoing attention.
Last week, U.S. Stocks, Foreign Stocks and Bonds all increased. During the last 12 months, STOCKS outperformed BONDS.
Returns through 8-12-2016
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
.4
5.9
5.6
4.2
3.3
5.0
US Stocks-Standard & Poor’s 500
.1
8.3
7.0
11.3
15.6
7.8
Foreign Stocks- MS EAFE Developed Countries
2.9
1.9
-4.4
1.7
5.7
2.2
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week, due to Laurie’s vacation, the broadcast will be a prerecorded show.
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The stock market finished little changed last week in quiet summer trading. August doldrums were punctuated briefly by all-time highs set on Thursday, though prices retreated slightly on Friday.
Soft U.S. retail sales and consumer sentiment data out on Friday dampened investor enthusiasm. Interest-rate hike expectations eased, which led to a 1% drop in financial stocks on the week.
All three major U.S. indexes hit highs simultaneously on Thursday, the first time that has happened since Dec. 31, 1999, during the dot-com boom. (The Nasdaq did it again on Friday.) That era seems a long time ago in a galaxy far away. Today’s market continues to rally despite finding little support among institutional investors and facing downright skepticism in many quarters. Perhaps that’s where the bull’s strength lies.
The Dow Jones Industrial Average rose 33 points, or 0.2%, last week, to 18,576.47, below the record high of 18,613.52. The Standard & Poor’s 500 index inched up by one point to 2184.05, just below its high of 2185.79. The Nasdaq Composite gained 0.2%, to 5232.89, another new high.
Investors live in a world of low corporate profit growth and low bond yields, notes Douglas Cote, chief market strategist at Voya Investment Management. That’s conducive to making an already pricey market—the S&P 500’s price/earnings ratio is 18.5 times 2016’s earnings—more expensive.
The desperate search for yield continues, as evidenced by the better-than-18% returns this year in ho-hum sectors like telecom and utilities. Consequently, says Cote, the market shouldn’t be measured against its own historical average P/E, about 15 times, which suggests it is expensive. Instead, it should be compared to bonds and other alternatives. With the Treasury’s 10-year note yielding 1.5%—near lows not seen before in modern history—there’s no alternative to stocks for investors who want returns.
The more stocks go up, the more those sitting on the sidelines will be forced to capitulate and join in, Cote contends. Thus, he maintains, the market can continue to get more expensive in the context of such low bond yields.
In a way, this market—though much less expensive than it was in the dot-com era, when its P/E hit 28—has something in common with that old bull. In those days, there was an emotional euphoria about powerful profit-growth expectations, driven by then-new Internet stocks. Today, another emotion—a desperation for yield—mirrors that euphoria. In 1999, the market reached its 28 P/E when bonds were yielding about 6.5%—yes, you read that right.
