Recent Letter to Clients {Part III}

Here is part III of our latest investment letter to clients which was sent to them last week.  Parts I & II were published last Wednesday and Thursday.  The letter was posted in a question and answer format.

How will the elections affect the markets?

Probability suggests that the market is currently pricing in a Clinton Administration.  It also suggests if investors begin to doubt this consensus then markets could be in for some weakness. Investors hate uncertainty.  While Mr. Trump is well known to the business world, Trump as a politician and President is a huge unknown.  We know little about what a President Trump’s economic policies would be and what he has said in this regard so far has been vague and often contradictory.  Whatever one may think of the Clinton’s, Mrs. Clinton has a long history in government.  The business community already has a basic understanding of what a likely Clinton Administration would do in terms of financial affairs and the economy.  One thing that I think has a higher probability of occurring  regardless of who is the next President is more spending on infrastructure.  There seems to be some political will for this in both parties so the next President could have the capital to push this through Congress.  For one thing the country needs it. All you need is to take a look at the roads! Infrastructure spending has also traditionally been a large jobs creation program so it would also be popular.  It might even become more  politically feasible if it becomes part of some sort of “Grand Bargain” linking such spending with a reform of tax policy and immigration reform.

You have talked in the past about seasonal weakness in stocks and I just heard them talking on CNBC about the same thing.  Should I be worried?

In terms of being worried about what happens to the markets, the short answer is that you should always have a portfolio that fits your comfort level and individual risk/reward profile.  We should talk if these criteria have changed.  Market seasonality is a subject on which I’ve written extensively over the years.  The basic premise is that stocks tend to perform poorly around the period of approximately April-October.  I’ve discussed this many times in the past and it is enough of a statistically proven concept for me to say there is a higher probability that stocks will struggle between now and sometime in the fall.  You can click on here to see my explanation from 2012 on why we think this occurs.  Of course, this could be the year that proves to be the exception.  It could be that stocks ignore past history this summer and explode higher.   I think this is a lower probability event given current valuations, but it is not beyond the realm of possibility.

This historical weakness can be further segmented by how markets have traded on average during the April-Autumn cycle.  By looking at trading data over the years you often see the following pattern:  First you typically see a period of weakness in late spring with markets usually becoming over sold by early June.  This is followed by a rally into early-mid July.  Then there is a topping process towards the end of July-early August.  Finally comes a period that is extremely susceptible to a more intense sell-off into the September-October time frame.  Often the market then rallies at least into year-end, but also into the first quarter.  Election years tend to see this pattern more pronounced when Wall Street can’t decide who will be the winner.  Again since I think markets are discounting a Clinton Presidency, a change to this perception could mean that volatility returns to the markets.  Now this pattern doesn’t work every year and I’m generalizing a bit on the dates.  However, there are enough historic tendencies where this has repeated itself year after year that I believe investors need to understand and respect this cycle.

We will conclude this letter tomorrow.

*Long ETFs related to the S&P 500 in client and personal accounts.  Please note these positions can change at any time.