The Investor September 2024
ShareFinder’s prediction for Wall Street for the next 3 months (top) and the JSE (bottom).
If you have a friend who would like to receive this free publication, please send their name and e-mail address to support@rcis.co.za
Starting a new era!
By Richard Cluver
“All over the world, elite institutions from governments to media to academia are losing their authority and monopoly control of information to dynamic amateurs and the broader public. This book, until now only in samizdat (and Kindle) form, has been my No. 1 handout for the last several years to anyone seeking to understand this unfolding shift in power from hierarchies to networks in the age of the internet.”
—Marc Andreessen, cofounder, Netscape and Andreessen Horowitz referring to a powerful must-read book by Martin Gurri called The Revolt of the Public.
I am once again indebted to US economist John Mauldin for highlighting the above quotation which sums up my own growing concerns about the current state of our world torn as it is with the uncertainty of new beginnings, for politics is changing the face of the world as we understand it and monetary policy is changing the shape of how we should invest our hard-earned savings.
In a column this month Mauldin reminded us of a quotation by former president George W. Bush, who offered a simple diagnosis of the current political moment: ‘You wonder why populism is on the rise. It starts with taking taxpayers’ money and giving it to the powerful.’”
The US economist is one of the leading proponents of a growing wave of concern because they all see a crisis likely culminating at the end of this decade. At the heart of it is the growing debt of leading governments epitomized by that of the USA where a $2 trillion deficit and $35 trillion of national debt is on the way to $50 trillion in less than 6–7 years, an issue that was not even on the agenda when the two US presidential hopefuls Kamala Harris and Donald Trump clashed in one of the most viewed TV debates of modern history.
What do we make of $1 trillion in US interest payments every year? Can the average person even understand what that number means? Here it is:
$1 000 000 000 000
Simultaneously with this growing global concern which is overturning governments everywhere yet bringing few solutions to an international crisis of confidence, I and many of my readers who came on board half a century ago are becoming increasingly aware of our own mortality.
As I began explaining in the August issue of The Investor, I have reluctantly begun preparing for an era when my brain might not be as sharp as it has been in the past. So my question to all of you readers is whether you will be up to the decision-making we will need if those who fear the coming “Great Reset” are correct in their predictions?
For those who have missed my own announcements of an artificial intelligence project which has occupied much of my time recently in association with the team at ShareFinder International, I completely understand because in this new world we daily receive so much communication that many feel overwhelmed. Furthermore, we humans instinctively shy away from change because of the uncertainty and indecision it brings with it.
So let’s go back to the beginning so I can explain the changes I am setting in place. In my own case I was becoming increasingly aware back in the 1980s of the need for “ACCURATE” investment information rather than the stockbroker gossip of those times. I was accordingly led to create the original ShareFinder database and that in turn gave me an edge which turned my own investments into gold. Happily too, back then I had one of the loudest voices in the South African investment industry courtesy of the Argus group of newspapers whose editors willingly granted me acres of space during those turbulent years.
But my own greatest surprise back then – and even more so in the years that have followed – was that the portfolios my database allowed me to build so easily surpassed those of the professionals…and over the years have continued to do so. So I must stress that what I did was not particularly inspired. I just applied the age-old and well-understood principles of finance and economics to build a database of share market statistics which allowed me to distinguish fact from fiction in the investment world.
You do not have to be clever to appreciate that the shares of a company which makes consistently-rising profits from an easily-understood business plan will grow consistently in value. So all you really need to ensure a comfortable retirement is to add thrift and time to that essential fact and wealth will naturally follow. Thus, despite the turbulent history of the past 124 years, the oldest share market index of value, the Dow Jones Industrial Index, completely illustrates that truth:
We have had wars, pandemics, the Great Depression and any number of localised crises, and though some have been followed by a few years of investment worry, Wall Street share prices have marched steadily upwards at an average of compound 4.5 percent year after year throughout. Indeed, the graph on the right from Curvo makes it clear that, but for two years in the past 33 years, the returns have always been substantial:
Closer to home, the JSE All Share Index has, because of our higher inflation rate, delivered a consistently higher 9.4 percent growth rate annually over the past 30 years which has amply sheltered South African investors from the peril of our elevated average inflation rate as my following graph illustrates:
However, the All Share Index is, just as its name implies, a composite of ALL the shares listed on the JSE. One can thus quite logically do better by choosing just the top 40 shares by market capitilisation and that is best exemplified by Sanlam’s Satrix 40 unit trust which is South Africa’s most popular investment, and not surprisingly so because, as my next graph illustrates, the Satrix 40 has delivered compound 10.2 percent annually over the years. That’s 8.5 percent better than the All Share Index!
And then we have my own approach which was to create a Blue Chip Index consisting of shares which have delivered consistently-rising earnings and dividends over extended periods of time. To be included in my Blue Chip list such shares are also required to deliver on other time-honoured principles such as their return on shareholder’s funds, tradeability and so forth. Such shares understandably perform much better than the average in the marketplace, which is why my Blue Chip Index in the next graph below has delivered a far superior annual 14 percent since I first created in back in 1989: that’s 65 percent better than the All Share Index!
All of which explains why my Prospects Portfolios, created from such Blue Chips has been able, noting the purple trend-line in the South African example below, to deliver an annual compound 14,4 percent since its inception in January 2011. Add to that a 4.4 percent dividend yield and one can understand why the South African Prospects Portfolio has been able to deliver a consistent average Total Return of 18,8 percent.
However, in keeping with the drastic slow-down of the South African economy in the hands of the ANC, local corporates have increasingly struggled in recent years to achieve the same levels of growth as they previously managed. For example, the JSE Top40 has slowed to compound 8.4 percent over the past five years as the green line in the following graph illustrates.
So it is in such tough conditions that the system of selecting the ‘best of the best’ has proved itself. In the following graph, the five-year performance of the SA Prospects Portfolio is illustrated to be still faithfully delivering compound 14,4 percent.
Furthermore, before the formation of the Government of National Unity there were very real fears of a Rand collapse and a massive withdrawal of what foreign funds still remained in South Africa. And the GNU is still a fragile thing despite the affirmation of a rapidly strengthening Rand and an even more impressive explosion of value on the JSE which has translated in the case of the Prospects Portfolio into a dramatically-increased recent annualised growth rate of 38 percent since last October’s low.
Hopefully then I have shown why it has not been all that difficult to create an algorithm to replicate the selection processes which have given the Prospects portfolios such superior performance in all the markets we have operated in. And that has opened up the possibility of creating a managed fund which followers of my columns might make use of in order to spare themselves the task of slavishly following my writings.
And here, because recent tax legislation all over the world has increasingly penalised Do-It-Yourself investors and made it well night impossible to manage a personal portfolio without attracting punitive taxation, is the principal reason why I am moving to establish an algorithm-driven unit trust.
Many of you have been perplexed by my earlier references to the capital-gains-tax-free process which unit trusts allow, so let me explain! Section 40CA of the Income Tax Act allows the operators of a unit trust to accept shares held by an individual investor in return for the issue of units to the same market value. Private investors taking advantage of the process are, of course, not entirely exonerated from the eventual liability for Capital Gains Taxation. It is, however, deferred until such time as the investor decides to dispose of the units he has acquired.
In the interim the Unit Trust managers have the right to sell the shares they have so acquired in order to replace them with others in the interests of achieving a better risk-spread, and vitally important, without the penalty of any taxation. Thus, for example, the current SA Prospects Portfolio contains a parcel of Capitec shares that were bought at R178 a share and which are now worth R2 925.94 a share. On their own they thus make up a disproportionately-high 16 percent of the portfolio. Similar growth explosions apply to the portfolio holdings of Clicks and PSG shares.
If anything happened to tank these three shares it could have alarming consequences for the overall portfolio value and just as serious consequences for investors relying on such a portfolio to supplement their pension income. Prudence thus suggests that one should sell some of the shares and replace them with other similarly-performing shares in order to achieve a better balance of risk. But the Capital Gains Tax consequences would be disastrous for most long-term investors.
Using a Section 40CA swap accordingly allows one to achieve just this balancing act because you can “lend” such shares to a suitable unit trust with the implied promise that if you ever wanted your original investment shares returned to you, the Unit Trust could do just that. In the interim, however, it is free to take your shares and sell them in exchange for others without a CGT consequence.
It is precisely because of this facility that many formerly very active private investors have in recent years handed over the management of their portfolios to the professional teams which run unit trusts and ETFs internationally.
Clearly then, if one could merge the advantages of using a unit trust management system linked to the share selection processes that have given the Prospects Portfolios their edge over most professionally-managed funds, one should achieve an amazing winner. That is why the team at ShareFinder International has been burning the midnight oil for many months in order to teach computers to replicate the share-selection techniques I have long used.
With each iteration of their work, the results have grown better. Running in ‘autopilot’ mode the algorithm has delivered a comparative 12.46 percent for a 20-share portfolio and 14.8 percent for a 10-share portfolio, each with an accompanying aggregate dividend yield of 4.4 percent.
Most importantly, it has beaten my Prospects Portfolio and has to date proved to be 87.34 percent better than South Africa’s most popular fund, the Satrix40, which has delivered a compound annual average growth rate of just 7.9 percent over the same period. Readers might accordingly appreciate that we have a powerful new tool to work with and our investment outlook has seldom looked brighter!
Meanwhile, scores of you have written in to say you will back my proposed ShareFinder-driven Unit Trust initiative and the potential investment sums you have promised are piling up steadily. However, there is a very long way to go to allow us to attain the critical mass required by the service providers who would manage such a unit trust on our behalf.
So if you have not yet done so, please communicate your views and, hopefully, the extent of your possible future commitment. You can write to me in confidence for my eyes only at fund@sharefinderpro.com which is a closed user group created so that potential participants can discuss the project in private and plan our future!
A Sticky Last Mile
By John Mauldin
I remember travelling as a young boy on long trips and asking my parents, “Are we there yet?” I was later punished for this annoying behaviour by having my own children ask me the same question over and over.
On a national scale, we have been asking the same of the Fed. Now I think we can confidently say, “We’re here.” Barring unusual events, the Federal Reserve will finally start loosening its grip this month. Jerome Powell himself, speaking at the Fed’s Jackson Hole conference, all but promised rate cuts are imminent.
Powell’s iconic line, “The time has come for policy to adjust,” grabbed all the headlines but his speech had other interesting points. It was also admirably free of the Fed doublespeak that often leaves us even more confused. Powell seemed to relish the chance to finally deliver what he feels is good news.
He wasn’t wrong. Inflation, while still too high, is much improved. Unemployment is up almost one percentage point from last year’s low, but still lowish. The Fed has room to lighten up a bit. Yet it won’t change our path toward a severe debt crisis in the next few years. One problem may be passing but a much greater one lies ahead.
To me, the most interesting part of Powell’s speech was his review of this inflation cycle’s origin and the Fed’s response. Some of it has a “victory lap” feel I’m not sure is justified. It’s still an interesting glimpse into his thinking and, I suspect, his desire to shape how history will record this period. Today we’ll review Powell’s address and compare it to what else is happening in Washington.
Whose Confidence?
I’ve given Jerome Powell a lot of grief, along with a few plaudits. Ditto for all past Fed chairs. So, at the risk of surprising longtime readers, I recommend his Jackson Hole speech even if it is somewhat revisionist. This is his core thinking and will reflect what he does over the next 17 months of his tenure. You may want to read the transcript first and then come back here to read my comments.
Keep in mind, Powell and his staff knew this speech was critical. You can bet they debated every word. Powell thought carefully about what to say and how to say it, then said exactly what he meant to say. Some of it may be wrong but it’s not accidental.
He began by talking about the near-term economic outlook.
“Inflation is now much closer to our objective, with prices having risen 2.5 percent over the past 12 months. After a pause earlier this year, progress toward our 2 percent objective has resumed. My confidence has grown that inflation is on a sustainable path back to 2 percent.”
Note the pronoun change from “our objective” to “my confidence” on inflation falling toward that objective. Why say it that way? Maybe he knows other policymakers don’t share his confidence.
As noted, Powell’s “the time has come” line got most of the press coverage, but the following sentence got less attention.
“The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
I think this is a subtle but important shift. The FOMC members have gone from “We haven’t decided what to do” to “We’ve decided what to do unless something changes.” They’re on track to loosen but still arguing over details.
Note also how Powell mentions “the timing and pace” of rate cuts. That signals the possibility that whenever rate cuts start, they could happen in something other than 25-basis-point steps. (More on when they move to possibly cut more below.)
Finally, one more small but telling note in the way Powell describes current policy.
“We have held our policy rate at its current restrictive level since July 2023.”
It is true that the federal funds rate has been at its current level since July 2023. But Powell goes further, characterizing it as a restrictive level.
Not So Transitory
Powell spent most of his brief Jackson Hole appearance reviewing the latest inflation cycle. In his telling, the Fed had little to do with inflation’s rise and a lot to do with its fall.
Talking about the Fed’s aggressive COVID response, Powell said:
“At the Fed, we used our powers to an unprecedented extent to stabilize the financial system and help stave off an economic depression.”
I haven’t checked, but I’m pretty sure sitting Fed chairs don’t often use the word “depression” in the sense he did. Powell says depression wasn’t just possible but imminent in early 2020, and that the Fed’s actions helped prevent it. That last part is debatable, but the important part here is that Powell not only believes it but has no regrets. He went on:
“After a historically deep but brief recession, in mid-2020 the economy began to grow again. As the risks of a severe, extended downturn receded, and as the economy reopened, we faced the risk of replaying the painfully slow recovery that followed the Global Financial Crisis.”
If the risk of repeating that “painfully slow recovery” was foremost in their minds, it makes the Fed’s policymakers look like generals fighting the last war. In fact, COVID was not at all like the Great Financial Crisis. It was a different animal that needed a different approach.
One sign of this should have been that, unlike the post-GFC period, this era quickly turned inflationary. Powell described its appearance.
“After running below target through 2020, inflation spiked in March and April 2021. The initial burst of inflation was concentrated rather than broad based, with extremely large price increases for goods in short supply, such as motor vehicles. My colleagues and I judged at the outset that these pandemic-related factors would not be persistent and, thus, that the sudden rise in inflation was likely to pass through fairly quickly without the need for a monetary policy response—in short, that the inflation would be transitory.”
Oops. But in Powell’s version of events, the Fed wasn’t fooled for long.
“For a time, the data were consistent with the transitory hypothesis. Monthly readings for core inflation declined every month from April to September 2021, although progress came slower than expected. The case began to weaken around midyear, as was reflected in our communications.
“Beginning in October, the data turned hard against the transitory hypothesis. Inflation rose and broadened out from goods into services. It became clear that the high inflation was not transitory, and that it would require a strong policy response if inflation expectations were to remain well anchored. We recognized that and pivoted beginning in November. Financial conditions began to tighten. After phasing out our asset purchases, we lifted off in March 2022.”
The data turned inflationary in October and the Fed pivoted in November. Really? That’s not my recollection. But this section may explain at least part of the delay. Powell seems to be saying the Fed had to stop its asset purchases before it could raise rates. He doesn’t explain why they needed six more months to do so.
Nevertheless, Powell says it all ended well. Having skillfully navigated the inflation cycle, “the time has come” to let off the brake. And that’s what they will likely do this month. Then what?
This speech was clearly a “victory lap” but the actual history is rather revisionist. They waited too long to raise rates and let inflation get out of hand, as I and others were writing at the time. Yes, much of that inflation was due to fiscal incontinence, but the Fed didn’t help.
Powell also didn’t mention how the Fed isn’t the only player. Something curious is happening just a few blocks away.
The Fed may be poised to loosen short-term rates, but the Treasury is doing the opposite. Possibly because it has little choice as the debt continues rising. Let me explain.
Borrowing as efficiently as possible is important when you are the world’s largest debtor. The Treasury has a lot of discretion on how it manages the federal debt. It needs to raise certain amounts but can borrow short-term, long-term, or anywhere in between. Treasury can also repurchase its own debt, replacing that amount with newly issued securities at a different maturity. All this activity becomes more important as the amount of debt increases, as it has been and will continue to do.
Two important things are happening right now. First, the Treasury has been shifting a larger part of its new issuance to short-term Treasury bills. That’s a bit odd since the yield curve is still inverted, although the 2–10 spread is now flat. (That’s what happens when the yield curve starts normalizing. Typically, this is followed by a recession.) They are borrowing mostly in the zone with the highest rates. But there’s a reason for it, which I’ll get to in a minute.
The other new development is the Treasury has been buying back longer-term Treasury securities. This seems to have started in April and is an ongoing effort. For example, Wolf Richter reported last month they had repurchased $2 billion in 20-year bonds that had been issued in 2020 at 1.25%.
Again, this seems odd, if not foolish. If your debt is at a historically low fixed rate, why give it up? We are unlikely to ever see such low rates again. To me this seems like an “own goal.”
The net effect of Treasury’s activity—borrowing more at the short end, injecting liquidity into the long end—is to push long-term interest rates lower. It’s a form of economic stimulus, which might be okay but could also add inflation pressure… just as the Fed thinks it has inflation on the run.
Shifting more debt to the short end means that debt will mature sooner, maybe letting the government refinance at lower long-term rates. That seems to be the bet, at least. We’ll see how it works out. But they are likely right. Lacy Hunt thinks that the Fed needs to cut about two points over the next year. The market seems to think that as well. But if Lacy is right, it also means the economy will soften more than we now think.
But the bigger point is we now have not just the Fed, but the Treasury working to push interest rates in a desired direction. And not necessarily the same direction, though we should hope they at least try to coordinate. Powell and Yellen have worked together before.
Paradox of Negative Savings
Lacy Hunt in his latest note for Hoisington pointed out that net national savings is now negative and has been for some time. Personal savings are still positive, but the massive fiscal deficit is draining the potential for growth from the economy. Here’s what he said in his recent letter:
“Amidst a widespread deterioration in the economic landscape, it is crucial to underscore the current detrimental roles of monetary and fiscal policy. The sharp deceleration in detrended real M2 money supply growth, a fundamental cause of aggregate economic fluctuations, is a stark reminder of the past. Prior to nine of the 10 recessions since the early 1950s through the start of the pandemic, monetary restraint has consistently reduced inflation, economic activity, and short- and long-term bond yields.
“The worsening fiscal policy condition, as measured by the existing status of negative net national saving (NNS), reinforces the contractionary influence of monetary restraint. The premise of J.M. Keynes, founder of the Keynesian school of economics, was that excessive saving is the cause of major economic downturns. When individuals do the right thing (i.e., save for future needs and contingencies) consumer spending is insufficient to prevent economic slumps, which Keynes called the “paradox of thrift.” Negative saving, however, means that Keynes’ paradox no longer applies because no surplus exists. Thus, Keynes’ solution of enormous deficit spending to drive the economy disappears. Indeed, it suggests just the opposite. Deficit spending must be reversed or net national investment, a requirement for future growth, will not exist.”
And there you have it. We are on the path to a no-growth economy which will make the deficits even worse. But if the deficit and the debt are causing the low growth, the standard “grow ourselves out of it” solution won’t work. Call it the Paradox of Negative Savings.
Payroll Conundrum
The ADP jobs August report came in at 99,000, well below the expected 161,000. The ISM reports we have been in a manufacturing recession for at least six months and lost 24,000 more manufacturing jobs last month. Higher income sectors like travel and hotels are busy. Auto sales are soft. Housing is getting softer as people are either balking at the high rates or waiting for lower rates in the future.
The BLS payroll number for August was 144,000, versus expectations of 160,000, and expect significant downward revisions (which I documented the reasons for a few weeks ago). June and July’s job gains were both revised down substantially, by a combined 86,000 jobs.
Headline unemployment was down 0.1% to 4.2%, but it was all part-time jobs, as we lost 438,000 full-time jobs. The household survey showed 168,000 jobs added, comprised of 369,000 from those aged 55 and over, offset by a fall of 383,000 for those aged under 25. Just ugh. The broader U-6 unemployment rate rose to 7.9% from 7.8%, the highest since October 2021.
From Barry Habib at MBS Highway:
Source: MBS Highway
Five of the last six rate cutting cycles began with 50-basis-point rate cuts. Powell and the FOMC can read this report any way they want, in terms of deciding whether to cut by 25 or 50 basis points. They are behind the curve, but the payroll data is not a screaming problem, but was still ugly. Powell in his speech left himself open for anything.
There is no clear direction from the futures market. It was 50–50 on Thursday and as I write is slightly favoring a 25-basis-point cut. That is offset by 100 bps of easing priced in by end of this year, and another 125 bps by the end of next year. Which gets us to Lacy’s suggested endpoint, if not as fast. If the economy weakens more, expect that rate cut cycle to accelerate. Let’s hope it doesn’t.
This is one more twist in what I believe will be a years-long run-up to the real crisis, when the bond market finally imposes some discipline on our free-spending ways. For now, I expect they can keep things reasonably stable, the Fed’s next move and election results notwithstanding.
By 2028? I think we’ll be in a darker phase. It could last awhile… but there will be light at the end of the debt tunnel.
Your Portfolio and the Election
by David Bahnsen
We are officially in that season when investors begin obsessing over the presidential election, joining the media’s excessive interest in something highly unlikely to have the impact they expect. This isn’t to say elections don’t matter. They do. In matters of personal preference, policy convictions, civic and cultural vision, and yes, market and economic impact, elections can make a difference. My comment is about magnitude.
Elections tend to be overrated in how much they can improve an individual’s life, the conditions one cares about in the country, and yes, the markets and economy. But having a more modest view of impact is not the same as advocating for total apathy. Elections matter, and complacency is anti-patriotic and anti-democratic.
The specific political calculus is different every four years (really, every two years, for those taking a close enough interest), and contextualizing our analysis of the election and its expected impact on investors requires a deeper dive.
You may have noticed how politics has become a loaded and often toxic part of American public life. To an extent this has always been true—politics has had the potential to be a divisive topic for decades. But objectively, it seems and feels worse now than it has in my lifetime. Friendly discourse is hard to come by, and “mere political disagreement” is rare. The stakes have been elevated to threaten friendships, workplaces, and even families.
The “us vs. them” tribalism overtaking American politics is a tragedy not only for its impact on social cohesion, but also for the diminished intellectual contemplation it creates. Constructing cogent public policy is much harder when one is forced into a box “their side” would approve of, and especially if one believes any opposition to their policy proposals means the opposing side is “evil.” This has all gone out of control, but I would be wrong to say I thought it was about to get better. Sadly, a deep divide has taken hold, and I suspect we are years away from it improving.
I bring all that up because I want to make clear that I am not writing about politics in John Mauldin’s Thoughts from the Frontline because I have a political or partisan agenda to share. My aim herein is for the betterment of investors. There are considerations investors may want to remember in this election season and potential consequences that are fair game in any objective sense. But in the spirit of civility, fair play, and transparency that I lament as missing in the preceding paragraph, some disclosures may be useful before we begin.
I am a center-right movement conservative. I have been since kindergarten when I began reading Bill Buckley and National Review. I am a strong advocate of free enterprise, and I generally favor a constrained vision for the state’s role in the marketplace. I would love to tell you my analysis is devoid of any bias or presuppositions, but I don’t believe that is possible.
There ought to be a clear distinction between one’s description of “what is” and their prescription for “what ought to be.” When it comes to investment advice, I meticulously strive for exactly that (and even consider it my fiduciary duty to do just that!). But I just feel John’s readers deserve to see my cards on the table. Here they are.
- I have never voted for a Democrat for president, and I won’t be this year, either.
- I also didn’t vote for the Republican nominee the last two elections, and I won’t be this year, either.
- I was registered as a Republican from age 18 to age 49 and am now registered Independent.
My partisan allegiances are more flexible these days, but my ideological leanings are as pronounced as ever—I believe in the American experiment, a limited federal government, fiscal sanity, and a populace rooted in self-government and individual responsibility. Dare to dream.
I bring this up to make abundantly clear that no offense is intended by anything I say. I am who I am, and I call balls and strikes out of that reality.
Predicting the Unpredictable
The first thing to be said in assessing this election cycle is that we live in crazy times. It was late June when that fateful debate doomed President Biden’s prospects, and the next several weeks saw years of history unfold. It is hard to believe that an assassination attempt on former President Trump, unsuccessful by mere centimeters, is not even remembered anymore. That story alone is one for the history books, but the story of the Democrats not having a primary season, seeing an incumbent President withdraw his own candidacy for the first time since 1968, and the way in which the party coalesced around the Vice President as their candidate all speak to the rapidity with which things change.
The idea that someone on Labor Day weekend believes they know the result over two months out is insane. The last two presidential elections were determined by less than 80,000 votes, combined, in just a few states, out of 150 million votes cast. We are in a 50–50 country in so many ways, and the nature of the electoral college makes it very difficult for either candidate to run up the score in the states where they are most popular. The reasonably high floor of both candidates (45–46% by my analysis), but also the reasonably low ceiling of both candidates, makes this an election that will most likely, once again, be settled by thin margins in just a handful of states (and within those, by just a handful of counties).
It also is not true that investors would gain a significant edge in markets if they knew who the next president were going to be. Whoever occupies the White House has a certain amount of executive authority, strong discretion in the appointment of judges, the ability to veto legislation (as if that happens much), and a lot of leeway over personnel in cabinet departments. Yet the separation of powers embedded in our Constitution doesn’t allow the president carte blanche in passing legislation.
The bicameral nature of our legislature means that both the House of Representatives and the Senate are needed for legislation to pass. In fact, one of the most underreported realities of the Biden administration is that with a numerical majority in the US Senate and House they were unable to pass their signature and most ambitious legislative project (the so-called Build Back Better Act). While the Democrats [narrowly] lost their majority in the House in the 2022 midterms, they had a majority of the Senate all four years, and in 2021 were blocked from passing Build Back Better by members of their own party (Senators Manchin and Sinema from West Virginia and Arizona, respectively). In other words, not only do presidents often need bipartisan support to pass legislation, but they are also not even assured a blank check with their own parties.
I do not make my living projecting what Nvidia stock will do next and I certainly don’t make my living doing political prognostication. I stand by my earlier call on the presidential race—it is a 50/50 country and the odds for each candidate should be considered something in the range of 50/50. An argument can be made for why Kamala Harris has a certain momentum and the advantages that come with her opponent’s liabilities, but an argument can also be made that the electoral college gives Donald Trump an embedded edge, along with the challenges the incumbent party has around immigration and inflation. It is going to be a wild two months, and I do not mean that as a positive thing.
Historical Context
I will soon get to my analysis of what these particular candidates may or may not represent when it comes to economic outlook and market opportunity. But let’s first just understand why associating a market outlook with a partisan aspiration is so futile.
Here is a little secret: Markets have generally gone up under Republican presidents and markets have generally gone up under Democratic presidents, and the reason for that is… wait for it… markets just generally go up.
Put differently, the profit motive doesn’t take a nap when a new president is inaugurated, and American companies have a remarkable way of staying laser-focused on maximizing profits no matter who is in the Oval Office.
Source: David Bahnsen
You are welcome to believe Herbert Hoover uniquely ushered in the Great Depression, or that George W. Bush particularly created the Global Financial Crisis of 2008. But what you basically see throughout 125 years of modern history is that the average drawdowns are similar under presidents from both parties, and the compounded annual growth rate is virtually identical. The narrative that has not worked is this:
My Republican friends: “President Obama is an enemy of markets and free enterprise and he is going to tank the economy for investors.” WRONG: The stock market was up eight out of eight years when he was president.
My Democrat friends: “President Trump is an enemy of norms and institutions, and his erratic ways are going to tank the economy for investors.” WRONG: The stock market was up 70% in his Presidency, despite the global COVID pandemic and shutdown.
These are the most recent examples of strong partisan angst being applied to expectations for markets, and markets having no interest in cooperating. But let’s dig a little deeper. Was President Reagan a good president for markets? I would argue so (remember my prior confession). Huge efforts at deregulation and marginal tax relief could not have hurt. There was surely some cause and effect. But were the 1980s likely to be a period of great growth in corporate profits, regardless? It’s certainly possible.
Was President Clinton a good president for markets? I would argue so (see, I am objective!). But was his presidency really the prime driver of the huge technology boom that ensued the second half of the 1990s? Of course not. Timing is everything, at least for how history remembers presidents.
Was President George W. Bush a disaster for markets? Well, the market actually went up +100% in the middle of his presidency (from Oct. 2002 through August 2007). But if you are bookended by a 40% drop at the beginning of your presidency and a 50% drop at the end (the dot-com crash to start and the Global Financial Crisis to end), it is going to be hard to see a strong result.
Was Barack Obama a good president for markets? On one hand, the market was up every year of his presidency; on the other hand, he took over at a generational bottom in the midst of a depression-type recession with a trough in earnings, and then an unprecedented era of monetary accommodation (an entire presidency with a 0% fed funds rate, and $4 trillion of quantitative easing!).
Your assessment of certain presidents may impact your opinions as to how they aided or hurt markets, but in almost every case there are objective arguments to be made for both. Timing matters. Circumstances matter. Luck matters. The Fed matters. And yes, presidential policy matters. But you know what doesn’t seem to matter? Party affiliation.
I don’t make up the facts; I just report them.
Policy Particulars
It would be easier to assess the implications of a presidential election on markets if one candidate said, “I want to reduce marginal tax rates a great deal across the board,” and the other said, “I want to raise all marginal tax rates a great deal across the board.” The tax policy difference between Ronald Reagan and Walter Mondale was clear, and tax policy matters to investors.
Likewise, the tax bill that passed in late 2017 (effective for 2018) contained a lot of bells and whistles investors predictably loved. From significantly lower corporate income tax rates to repatriation of foreign profits to a doubling of the estate tax exclusion amount to opportunity zones, there were plenty of components that investors naturally appreciated.
The 2018 market volatility, though, centered around the uncertainty of Fed policy (not under the president’s control) and the uncertainty of Trump’s tariff/China policies. If all we know is that one candidate wanted somewhat lower tax rates and the other didn’t, we don’t really know enough to know the expected market impact. First of all, the political realism of the policies matters (which is why markets never respond to crazy, onerous tax ideas like taxing unrealized gains—because the market rightly believes it is just politicians blowing air). Further, there is more to an economic agenda than just tax policy. I would argue that much of the favorable market conditions in President Trump’s term were more about deregulation than improved corporate tax rates. Energy policy matters. Trade policy matters. Personnel matters. There is a lot to an economic policy portfolio.
And this leads me to my underlying point about how investors ought to discount the two presidential possibilities we now face: How does one discount what they do not know? Thus far Kamala Harris has stated that her economic agenda is to give the FTC the ability to implement price controls on grocery stores (good luck with that), to give first-time home buyers $25,000 to help with their down payment, to implement a $6,000 child tax credit, and to stop taxing tips on service workers. Donald Trump said each of the latter two points before she did and has also said he will “make it the greatest economy you have ever seen.” And I will not lie—the “greatest economy we have ever seen” sounds like a good deal to me, but I am not totally sure how he plans to do that.
Trump has talked about high tariffs on imported goods, but also talked about only threatening to do so as a bargaining chip. He has not said much about tax rates at all. He has generally alluded to deregulation but has not been forthcoming on where he would deregulate. It is reasonable to believe he would be pushing for more energy approvals (drilling, pipelines, projects, etc.). But really, neither candidate is being specific on their policy ideas.
The Elephant in the Room
From tax policy to regulation to energy, the contrast between the two candidates is stark. Contrasts are easy to draw, even if the magnitude of impact is not.
However, the one area where it is safe to assume things will not get immediately better with either candidate is government spending and the government debt that supports the spending.
The national debt was $19 trillion when former President Trump took office, and it was $28 trillion when he left office. Vice President Harris has seen it increase another $7 trillion. Peace time, war time, good economy, bad economy, health scare, no health scare—it is the most bipartisan thing in America: Government spending keeps growing.
As John has documented, from entitlement spending to debt-to-GDP ratios to absolute levels of debt, we have unsustainable dynamics that are screaming for solutions. Some solutions exist, but none that are pain-free. Regardless, no such solutions are on the ballot in 2024. No one is running on Social Security solvency. No one is running on a balanced budget. No one is running on fiscal sanity.
This speaks to the reality of this election: There are some differences on various policy categories that matter (tax, regulation, trade, energy) if you assume certain things about both candidates; but when it comes to the most significant economic issue of our generation—the government debt level—there is nothing encouraging on the table.
Conclusion
I have gone on longer than I intended to so I will hold for a future Dividend Café additional commentary on health care, drug pricing, the impact of tariffs, and expectations around personnel (i.e., new Fed governors, anyone?).
My closing caution to you is to not settle for superficial analysis. I use as an example the following: I have said in this paper that Trump was a solid pro-energy president; energy was the worst-performing sector in his administration. He spent much of his time in office fighting with big tech; technology was the best-performing sector during his term in office.
Conversely, President Biden declared war on energy upon coming into office, cancelling the Keystone Pipeline, denying new permits on federal land, and eventually halting new opportunities for LNG export. Yet energy has been the best-performing sector during his term in office.
This is more than just anecdotal trivia. Markets and politics mix a lot less than we think, and they mix a lot differently than we expect. When you take an election cycle as crazy as this one has already been, add in the lack of policy specificity, consider the high likelihood of some form of divided government next year, and the low correlation between apparent policy biases and market reality, this election is not yet actionable when it comes to one’s portfolio positioning.
This can all change. More will be revealed in the weeks and months to come. The Fed is set to begin cutting rates. We will get more economic data. And when all is said and done, a country with over a 100% debt-to-GDP ratio is going to be there.
I think I’m writing in “dividend growth” on my ballot.
