Barclays Says Stock Bulls Confuse Correlation With Cause – Bloomberg 10-28-14

Salient to Investors:

Jonathan Glionna at Barclays said:

  • There is insufficient data not enough data – only 21 observations in the last 86 years – to expect a repeat of stocks’ habit of rallying after midterm elections – a median 7% in the 90 days following, with a range of -10% to +20% and positive returns 86% of the time.
  • The midterm results on November 4 will not cause market volatility, A Republican-controlled Congress is unlikely to enact near-term changes that will affect the equity market’s direction, while market reaction to Democrat control of the Senate would still be muted.
  • The S&P 500 will end 2014 little changed at 1,975.

The average of 19 strategists predicts the S&P 500 to end 2014 at 2,050.

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Growth Seen Beating 3% in Sixth Year of U.S. Expansion – Bloomberg 07-10-14

Salient to Investors:

  • The median economist predicts GDP will grow 3.1 percent in half2 2014 and 2015 will be the strongest year in a decade.
  • Ethan Harris at Bank of America sees no major headwinds and forecasts 3 percent growth in half2 2014 on fewer government cutbacks, rising auto demand and increased home sales.
  • Ryan Sweet at Moody’s Analytics said the job numbers indicate the Q1 2014 drop in GDP was an anomaly, and says payrolls will grow by 250,000 a month on average in half2, signalling an accelerating economy.
  • Lynn Reaser at Point Loma Nazarene University said higher grocery and gasoline prices are a risk to the outlook, and predicts 3 percent at best for the rest of 2014.
  • John Silvia et al at Wells Fargo Securities said investment, spurred by improving sales, will help sustain bigger gains in GDP.
  • Greg Valliere at Potomac Research said the economy is recovering quickly everywhere you look, and sees fewer political headwinds with federal government spending levels set through September 2015, the debt limit suspended until March 2015, and lawmakers focused on the November mid-terms.
  • Daniel Clifton at Strategas Research Partners said gubernatorial elections in over half of US states will boost the likelihood that they will take action on projects before November, offsetting federal spending and resulting in no fiscal drag going into half2.
  • Since 1990, the S&P 500 rose an average 8.7 percent in the Q4 of mid-term election years versus a 3.7 percent gain in Q4s in the intervening years.

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3 Reasons We’re About To See Volatility Erupt – Seeking Alpha 07-17-13

Salient to Investors:

Argutori writes:

The financial markets are due for a correction.

Volatility in the financial markets will spike before the end of 2013 because:

Volatility can’t go much lower. Historically, when the VIX has dropped below 15 the S&P 500 tends to fall as well.

Over the past 23 years, volatility has increased from July and is historically the highest in October.

Companies EV/EBITDA valuations are reasonable because companies are stock-piling cash. But when inflation starts to creep into purchasing decisions, they will want to beat the price rises. Cash-piles have grown at the expense of plant and equipment, so there won’t be sufficient capacity to meet new demand. When hoarding stops, US inflation could turn into a run-away train that will fuel volatility.

Didier Sornette says we are getting close to a top.

The Fed is confused, and doesn’t have any more tricks. Narayana Kocherlakota says the Fed is creating the next toxic asset bubble. James Bullard believes the Fed should not taper until inflation picks up toward the 2 per cent target.

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Most U.S. Stocks Fall as Manufacturing Unexpectedly Drops – Bloomberg 06-03-13

Salient to Investors:

John Lynch at Wells Fargo Private Bank said ISM was decidedly negative, and bad news can only be good news for so long for stock prices – at some point it will impact earnings and market levels.

Sam Stovall at S&P said the rally and strong start to the year may indicate further gains for stocks in June because there have been 13 7-month winning streaks since 1945 followed by an average 0.4 percent rise in the 8th month as stocks rose 62 percent of the time. The S&P 500 advances in January and February is bullish because the index has advance in each of the 26 years with such positive start since WWII.

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Using Seasonal and Cyclical Stock Market Patterns – AAII Journal 06-01-13

Salient to Investors:

Jeffrey Hirsch at the Stock Trader’s Almanac writes:

Three main seasonal and cyclical patterns have stood the test of time: the 4-year Presidential Election/Stock Market Cycle, the Best 6 Months Switching Strategy and January’s basket of indicators and trading strategies. Caveat. History never repeats itself exactly.

1. The 4-year Presidential Election/Stock Market Cycle:

  • Wars, recessions and bear markets tend to start or occur in the first half of the presidential term, and prosperous times and bull markets in the second half.
  • The third year in the presidential term has the best performance – there have been no Dow losses in pre-election years since 1939.
  • Presidents tend to take their more painful initiatives in the first half of their term and prime the pump in the second half.
  • Most bear markets began in post-presidential years – 1929, 1937, 1957, 1969, 1973, 1977 and 1981 – as also major wars – the Civil War (1861), WWI (1917), WWII (1941) and Vietnam (1965). Only in 1925, 1989, 1993 and 1997 were Americans blessed with peace and prosperity in the post-election year.
  • Practically all bear markets began and ended in the two years after presidential elections.
  • From the midterm low to the pre-election year high, the Dow has gained nearly 50% on average since 1914.

2. The Best 6 Months strategy is basically the flip side of the old “sell in May and go away” adage.

  • Institutional investors’ efforts to boost their returns help drive the market higher in Q4, as does holiday shopping and year-end bonus money.
  • September is the worst month of the year on average as back-to-school, back-to-work and end-of-Q3 portfolio window dressing causes stocks to sell off.

3. The January Effect

  • In late October, small stocks wake up and in mid-December take off and hold their lead through the beginning of May.
  •  NYSE stocks selling at their lows on December 15 will usually outperform the market by February 15 in the following year.
  • The Santa Claus Rally is the propensity for the S&P 500 to rally during the last 5 trading days of December and the first 2 of January by an average of 1.5% since 1950.
  • The January Barometer has registered only 7 major errors since 1950 for an 88.9% accuracy ratio – of the 7, Vietnam affected 1966 and 1968.
  • Every down January in the S&P 500 since 1938 has preceded a new or extended bear market, a 10% correction, or a flat year. The last 40 up First 5 Days produced a 13.6% average full year gain, and were followed by full-year gains 34 times.

Since 1950, all 3 indicators have been positive 27 times and full-year gains followed 25 times. All three indicators are positive in 2013.

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Using Seasonal and Cyclical Stock Market Patterns

U.S. Stocks Fluctuate as Investors Weigh Economic Data – Bloomberg 05-31-13

Salient to Investors:

Joseph Tanious at JPMorgan Funds said everyone is trying to figure the Fed – strong data reinforces the Fed message of the past few weeks and justifies the tapering of QE, while weak data makes people think the Fed is going continue QE a bit longer, with the end result of increased volatility.

Richard Sichel at Philadelphia Trust says it has been a wonderful month, with ‘Sell in May and go away’ blown apart.

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April Best for Borrowing Shows T.S. Eliot Was Wrong: Muni Credit – Bloomberg 03-27-13

Salient to Investors:

April is the most rewarding for investors in the municipal market – since 2009, yields on benchmark 10-year debt have fallen more in April than any other month. April has shown gains in each of the past six years. Yields on 10-year benchmark munis have fallen in April by 9 percent on average in the past 5 years, the biggest monthly drop in yields. Munis have lost value in March for 5 straight years as investors sell tax-exempt debt or avoid buying the securities to make tax payments.

John Hallacy at Bank of America Merrill Lynch said bondholders receive the most cash from maturing debt and coupon payments in June, July and August, so start planning how to invest that money in April – once they know their April 15 tax bill, they can invest. Hallacy said it’s just a seasonally strong month for a lot of technical reasons, including investors getting bonuses or other first-quarter payments.

Chris Mauro at RBC Capital Markets said during the past 10 years, investors on average pulled cash from muni funds in the second week of April, after adding money each week in March, and muni fund flows generally have returned to positive territory after April 15. Mauro said given the early March outflows in 2013, this snap back pattern in 2013 may not happen.

Craig Brothers at Bel Air Investment Advisors said yields on Treasuries tend to drop at this time of year as investors switch from equities, while munis are not as cheap relative to Treasuries as in previous years.

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Berkowitz Seeking Patient Capital Sours on Mutual Funds – Bloomberg 02-04-13

Salient to Investors:

Bruce Berkowitz at Fairholme Capital Mgmt said mutual funds are great vehicles but have rules that allow mutual fund holders to cash out anytime and puts his long-term investing style at a disadvantage, and hurts managers who favor concentrated positions. Berkowitz said he is prone to investing too early in stocks he thinks will recover – looks at cash assets, intrinsic value of the company and the price.

Berkowitz’s flagship Fairholme Fund’s worst year ever in 2011 led to an almost 60 percent drop in assets in the 2 years ended Nov. 30, despite the fund’s best performance versus the S&P 500 Index in a decade in 2012.

Morningstar named Berkowitz the domestic-stock fund manager of the decade in January 2010.

Kevin McDevitt at Morningstar said daily redemptions are a huge burden for money managers, especially ones like Berkowiz who make big bets on a few stocks.

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Berkowitz Seeking Patient Capital Sours on Mutual Funds

Obama Stock Market’s Low Volatility Favors Incumbents – Bloomberg 11-05-12

Salient to Investors:

Swings in US stocks are at the lowest level in 6 years, an indicator that has most often coincided with incumbent parties keeping the presidency in data going back to 1900. Daily changes in the Dow have trailed the 112-year average of 0.75 percent in 13 of 17 instances when incumbents won, in 6 of 11 times when incumbents lost. Volatility doesn’t predict winners but its decline shows less concern that prices will be whipsawed by economic news.

James McDonald at Northern Trust said the incumbent tends to get re-elected when the market is doing well, meaning the economy is doing well.

On average since 1900, the Dow has gained 9.3 percent in years before incumbent parties retain office and fallen 4.5 percent when they lost.

Alan Gayle at RidgeWorth Capital Mgmt said stock volatility is a barometer for investor psychology.

Incumbent parties have lost all four elections when daily changes averaged 0.94 percent or more in since 1900.

David Goerz at Highmark Capital Mgmt said exceptions to indicators such as volatility make them statistically meaningless – just as much evidence suggests Obama will be defeated.

Philip Orlando at Federated Investors said gains in stocks this year reflect investor optimism that Romney will win, address the fiscal cliff, and adopt more pro-growth fiscal policies.

Deutsche Bank said closer presidential races generate bigger rallies after the victor is chosen, with the S&P 500 rallying an average of 5 percent by the end of the year when one candidate led by about 3 percent or less.

Wall Street strategists estimate the S&P 500 index will surpass its all-time high in 2013, as earnings expand 4.9 percent.

In 28 presidential races since 1900, the Dow has gained 17 times between election day and the end of the year, for a mean return is 1.6 percent.

Earnings have helped keep the S&P 500 trading at a 15 percent discount in 2012 to its five-decade average in 2012.

John Carey at Pioneer Investments says equities have been gaining as investors bet policies will remain in place, helping companies keep earnings expanding. Carey said the market favors the status quo and a continuation of the current situation so that it can focus on earnings and economic data.

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U.S. Stocks Fall Before Elections on Greece Concern – Bloomberg 11-05-12

Salient to Investors:

70 percent of S&P 500 companies have beaten analysts’ estimates this quarter.

Dow fluctuations this year are the smallest in an election year since 2004, and less than the 112-year average when the incumbents won (13 of 17) and lost (6 of 11). Volatility declines indicate less concern that prices will be whipsawed by economic news, a benefit for Obama. No Democrat since World War II has held the White House with the Dow this far from its peak.

James McDonald at Northern Trust said the incumbent tends to get re-elected when the market is doing well.

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