Rising and Falling Uncertainty

Worries abound, from Chinese trade wars…to midterm campaign-related uncertainty…. [But] I’ve crunched data since long before PCs arrived, [so I know that] the Standard & Poor’s 500 index has been positive in 87% of the fourth quarters of all midterm election years, ever…. [emphasis added]

It’s also been positive in 87% of the quarters that follow — the first calendar quarter after the midterms. That’s six months running. It’s the most consistent positive streak in all history. Those six months typically render a +14% rise.

Why? Because people always fret the midterms — like they do now — and how this or that could happen that would be bad (never good). One basic rule is that markets don’t [care] about the absolute level of uncertainty. But they hate rising uncertainty and love falling uncertainty. Midterms bring falling uncertainty. Always!

It starts before the actual voting. October is routinely strong in midterm years. Why? With time, early-on wild speculation about outcomes fades as ever more individual Congressional races mature and fewer wild cards remain…. [During the primary season and in the weeks that immediately follow,] wild and woolly possibilities catch eyeballs and cause hysteria. That calms, then dies November 6th.

Further, the third year of a president’s term, like 2019, hasn’t been negative once since the start of World War II. And only twice since S&P 500 data began. It’s all about the rising uncertainty heading into the midterms followed by falling uncertainty after.

– By investment analyst Ken Fisher, writing in USA Today. Read the Full Article

Record-High Earnings

S&P 500 revenues and earnings soared to record highs during Q2-2018. No wonder the S&P 500 stock price index is back in record-high territory again…. Notwithstanding all the chatter about rising costs, the S&P 500 corporate profit margin rose once again to a record high of 10.9%. It was at a record 10.1% during Q4-2017 before the tax cut. It jumped to 10.5% during Q1-2018 thanks to the tax cut. Yet here it is at yet another record high….

The bears have been warning all year that the flattening of the yield curve increases the risk of a recession. They’ve cautioned that the escalating trade war could trigger the expansion’s downfall…. They’ve touted the worrisome notion that the growth rate of earnings is bound to slow next year. And of course, the bull could drop dead at any time, they say, simply because it is so old. Consider the following counter-arguments:

  • The yield curve is just one of the 10 components of the Index of Leading Economic Indicators, which has been setting fresh record highs for the past 17 months through July….
  • President Trump unilaterally has called a ceasefire in his trade war with Europe. Progress…[has been] made in negotiations with Mexico. Talks [are resuming] with China…. Perhaps it’s time to stop using the adjective “escalating” to describe the trade war? What if all this leads to less protectionism once the fog of war clears?....
  • There’s no doubt that earnings growth will fall from over 20% this year to under 10% next year. So what? Earnings should still be growing in record-high territory in 2019. Stock prices should follow suit.

– By economist Ed Yardeni of Yardeni Research, from his Dr. Ed's Blog

The Cognitive Biases Tricking Your Brain

Present bias shows up not just in experiments, of course, but in the real world. Especially in the United States, people egregiously undersave for retirement — even when they make enough money to not spend their whole paycheck on expenses, and even when they work for a company that will kick in additional funds to retirement plans when they contribute.

That state of affairs led a scholar named Hal Hershfield to play around with photographs. Hershfield is a marketing professor at UCLA whose research starts from the idea that people are “estranged” from their future self. As a result, he explained in a 2011 paper, “saving is like a choice between spending money today or giving it to a stranger years from now.”

The paper described an attempt by Hershfield and several colleagues to modify that state of mind in their students. They had the students observe, for a minute or so, virtual-reality avatars showing what they would look like at age 70. Then they asked the students what they would do if they unexpectedly came into $1,000. The students who had looked their older self in the eye said they would put an average of $172 into a retirement account. That’s more than double the amount that would have been invested by members of the control group, who were willing to sock away an average of only $80.

– By Ben Yagoda from an article in the September issue of The Atlantic magazine