New England Capital Blog

You know you’re deep into a longstanding bull market when you see things like average pedestrians keeping one eye on the market tickers outside of brokerage houses to see when the Dow Jones Industrial Average has finally breached the 20,000 mark.  Who would have imagined record market highs at this point last year, when the indices ended the year in negative territory?  Or when new year 2016 got off to such a rocky start, tumbling 10% in the first two weeks—the worst start to a year since 1930? 

The markets eventually bottomed in mid-February and began a long, slow recovery, turning positive by the end of March, suffering a setback when the U.K. decided to leave the Eurozone and endured another hard bump right after the elections.  In the end, we were disappointed; the Dow finished at 19,762.60 for the year—as the bull market has continued for another year.

This was the second year in a row that the final quarter provided investors with solid gains. The Wilshire 5000--the broadest measure of U.S. stocks—was up 4.54% in the fourth quarter of 2016, ending the year up 13.37%.  The comparable Russell 3000 index gained 4.21% in the final quarter, to finish up 12.74% for the year.

We are about a month away from the elections and our office has received several calls in regards to the effect that either candidate will have on the economy and consequently, the stock market.

Most people feel very passionately about this upcoming election.  Oddly though, I find that they are not strongly for, but rather ardently against a specific candidate.  Regardless of the flaws or characteristics of each nominee - what should we plan for when either of the candidates wins the general election?  A look back at history shows that presidential election cycles indeed correlate with stock market return. As for the outcome of elections? The impact might surprise you. Below, are a few things you should consider in election years.

According to a MFS Investment Management research report entitled, “Primaries, caucuses and elections–oh my!,” based on data from Ned Davis Research, from 1900 – 2008, the stock market, as defined by the Dow Jones Industrial Average (DJIA), performed better when the incumbent party won each given election, regardless of the political party of the incumbent.  Though historically, according to this research, market performance has been better historically under Republican Presidents as opposed to Democratic Presidents according to this research.

Chris Lee and I sent out an email on Friday June 24^th, the day after the historic vote in the United Kingdom where the British people voted to leave the European Union.  We told you to be prepared for a negative market reaction to the vote in world markets and increased market volatility in the following months.  While the Dow Jones was down by more than 600 points on the first trading date after the vote, many would be surprised to know that on the first day of July, the Dow Jones, S&P 500 and NASDAQ index were all higher than they were before the Brexit vote.  This strongly suggests to Chris and I, that once again people who panic and let their emotions rule their investment decisions are more likely to lose money by selling low and buying back at higher prices.  For those who understand that short-term volatility is the price to be paid for higher, longer term returns, they will be better positioned to achieve their financial goals.  

I don’t want to imply that Brexit is a “non-event.” Quite the opposite; Chris and I know that many questions remain not just for the United Kingdom (UK) and the European Union (EU), but also for the USA and around the world.  Brexit, along with future acts of terrorism, the seemingly endless Mid-East saga, the Zika epidemic, rising oil prices, declining oil prices or any other crisis du jour that our 24/7 news media bombards us with will certainly have an influence on us as investment advisors and how we consequently manage your money.  

Of course the biggest question is: Will the EU break up?  After all, the UK is the second largest economy in the EU.  There are already renewed talks of a Grexit (Greece departing from the EU) other clever names have already popped up too.  How about “De Partugal”, the “Czechout” and the “Big Finnish.”  We can even bring the issue closer to home with rumors of Texas leaving the United States.  

"I don't trust the stock market". I've heard that a lot over my 33 year career. It may even be the way you're feeling right now. Did the negative double-digit returns of the S&P 500 at the beginning of the year (which was the worst January in the history of the stock market), only to be followed by a positive double-digit return since mid-February, leave you feeling the same queasiness as riding the Wildcat roller coaster, the oldest continuously operating wooden coaster, at Lake Compounce in Bristol, Connecticut?    As the chart below shows the S&P 500 has a positive return in 27 of the last 36 years. Of course that means we've had nine years of negative returns during that time. The average annual return for the 36 years has been over 11%. But in order to enjoy that 11% return you must have been able to endure an average, temporary, intra- year decline of 14.2%.

As most of you have noticed, 2015 has been a bumpy ride (to say the least).  We have seen quite a bit of market volatility (markets up and down) with the Dow even moving 1,000 points on August 24^th, the largest intraday point decline on record.  If you feel like 2015 has been a roller coaster (with a lot of downs lately) – it has, as seen in the graph below:

With the help of technology, it is easy to get reminded daily of what is going on in the markets along with your investment accounts, most of which at the touch of a button.  With all of this uncertainty and volatility, please know that we are watching things very closely here at New England Capital.  It is easy to let your emotions get the best of you (fear is a pretty powerful emotion), which is where we (your trusted advisors) come in to help be that voice of reason.