Investment Commentary – January 27th, 2016

Market Indices as of Market Close January 27th, 2016

Dow 15,944 (-8.50% YTD)
S&P 1,883 (-7.88% YTD)
NASDAQ 4,468 (-10.77% YTD)
Global Dow 2,137 (2,077 52 week low /2,644 high)
10-year Treasury 2.00 (1.64 52 week low /2.50 high)
Gold 1,126 ($1,047 52 week low /high $1,300)
Oil $31.97 ($27.56 52 week low /high $65.69)

Weekly commentary overview

Equities sold off aggressively for most of last week before rebounding strongly at week’s end.

The selling earlier in the week was driven by the same litany of factors that has been troubling investors for months: plunging oil, falling U.S. earnings estimates, concerns over China and slowing global growth.

Absent evidence of a more pronounced global economic slowdown, the recent selling looks overdone.

That could mean some bargains are emerging, though most developed equity markets are still far from cheap.

Gauging the potential impact of the 2016 election

With primary season upon us, investor attention is beginning to turn to the upcoming U.S. election. More than in previous cycles, several factors make the outcome difficult to predict. The Republican presidential nomination race is wide open, with no clear front-runner and with many voters who remain undecided. The turnout for the presidential election will also impact the outcome for “down ballot” races in the House and Senate. While the House of Representatives is likely to remain in Republican control, control of the Senate could be in play, given the greater number of seats that the Republicans need to defend.

For investors, the key question is, will any of this make a difference for markets? As first discussed four years ago, while many investors connect political alignment with equity market returns, very few of these patterns hold up to scrutiny. Historically, whether a Republican or Democrat occupies the White House has had no statistically significant impact on U.S. equity markets. Another bit of myth that does not survive close inspection: markets do better under divided government. Interestingly, one political condition that does seem to matter for equity markets is the year within the election cycle. There is some evidence that markets generally perform worst during the first year of an administration and best during the third year. For investors looking ahead to 2016, historical patterns don’t suggest either a positive or negative bias.

However, while the political identity or composition of government may not be particularly relevant for the broader U.S. equity markets, investors are not wrong to focus on the election. Elections do have consequences for investors, since the direction of policy will be fundamentally affected by the voters’ choice. Although certain initiatives, such as corporate tax reform, are likely regardless of the next administration, other policy priorities are very much path dependent on whom is elected. Under a Republican administration, which is likely to coincide with a Republican Congress, individual tax relief and support for trade deals are more likely.

Should the Democrats win, presumably under Hillary Clinton, corporate tax reform is still likely but individual reform, while still possible, would arguably involve a more complex “grand bargain” tied to corporate relief, particularly as the House and potentially the Senate would remain in Republican hands? However, a Clinton administration would likely be willing and able to embrace immigration reform and make modest adjustments to the Affordable Care Act (ACA). Another area where the outcome will matter is the Federal Reserve (Fed). A Republican administration is likely to result in a marginally more hawkish Fed.


January 27th, 1985: Coca-Cola reveals plans to begin selling its soft-drinks in the U.S.S.R.

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.