Expect Higher Volatility (Up or Down) in January

Investing Environment Review and Outlook – Volume 33

We maintain our bullish 5 ratings for all equity classes (U.S., Developed and Emerging Markets). Goldilocks conditions prevail – including moderate economic growth, benign inflation below 2%, and a loose Federal Reserve. Historically, these conditions were positive for future equity returns. Additionally, following strong return years like 2019, January results were mixed (43% of the cases were higher) but the first quarter was up 86% of the time, with an average return of 4.1%. The worst Q1 decline in these years, was -3.7% in 1990, but there were three years Q1 was up over 10% (1976, 1986 and 1998). Our gold and commodity ratings remain a neutral 3, recommending no exposure. Our long-term bond rating remains a bearish 1 based on the positive 66 reading from our economic outlook indicators. We expect stronger than expected economic growth and higher long term interest rates in 2020.

Expect Higher Volatility (Up or Down) in January

At year end investors typically experience low volatility, and this year is no exception so far. Since October 3rd, the biggest peak to trough decline in the S&P 500 was just 1.9%. However, January can be a shock. Since 1950, the first two weeks of January saw 35% higher volatility than late December. The average return (up or down) in the first two weeks of January was 2.7% vs. just 2.0% for the last two weeks of December and even more dramatic since 2000 at 1.8% and 2.9%. For instance, since 2000 there were three years the S&P 500 was down over 6% in the first two weeks of January (2008, 2009, 2016) and 3 years when it was up over 4% (2003, 2018, 2019).

Impeachment: Not a Market Risk

On September 24th House Speaker Pelosi announced a formal impeachment inquiry. Public hearings started on November 13th and a vote on formal charges is possible before year end. Conviction and removal from office requires a Senate vote, which is unlikely with Republican control. The 1974 Nixon impeachment coincided with the worst equity bear market since WW II, while the 1998 Clinton impeachment had no material market impact.
So far, this year is more comparable to the Clinton case. In both Clinton’s and Trump’s cases, their own party controlled the senate, so removal from office was never considered likely. In September, Trump’s approval rating was 43%, significantly higher than Nixon’s at 25%, although Clinton’s approval was higher at 66%. The most telling difference is in the economic environment. During Nixon’s impeachment, inflation was 10% and rising due to sharply higher oil and gasoline prices after an OPEC embargo. The Fed hiked interest rates from 5.5% to 10% in 1973 and a deep
recession and bear market followed.

In Clinton’s case, inflation was benign at 1.8%, and the Fed had just cut 3 times after the collapse of Long-Term Capital Management. The impeachment had no apparent market impact. Six months after the House voted on Clinton’s impeachment, the S&P 500 was up 13.7%. Current conditions are very similar in those respects with inflation also at 1.8% and three Fed cuts this year. Politics receives a lot of headlines and can certainly affect stocks on a daily basis, but for the primary trend in stocks, politics is usually less significant than the economic environment.

In summary, Goldilocks conditions remain with Fed support through 3 rate cuts this year and $60 bil/month of outright purchases of Treasury Bills. Combined with moderate growth and inflation below 2%, the conditions remain bullish for equities. If the economy strengthens as we expect, our view could improve for commodities. Thank you for your support and please contact your advisor with any questions.

IMPORTANT DISCLOSURES

This review and outlook report (this “Report”) is for informational, illustration and discussion purposes only and is not intended to be, nor should it be construed as, financial, legal, tax or investment advice, of Brenton Point Wealth Advisors LLC or any of its affiliates (“Brenton Point”). This Report does not take into account the investment objectives, financial situation, restrictions, particular needs or financial, legal or tax situation of any particular person and should not be viewed as addressing any recipient’s particular investment needs. Recipients should consider the information contained in this Report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments.
This material is based upon information obtained from various sources that Brenton Point believes to be reliable, but Brenton Point makes no representation or warranty with respect to the accuracy or completeness of such information. Views expressed herein are current only as of the date indicated and are subject to change without notice.
This Report contains certain forward looking statements opinions, estimates, projections, assessments and other views (collectively “Statements”). These Statements are subject to a number of assumptions, risks and uncertainties which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward looking statements and projections. Brenton Point makes no representations as to the reasonableness of such assumptions or the likelihood that such assumptions will coincide with actual events and this information should not be relied upon for that purpose. Changes in such assumptions could produce materially different results. Past performance is not a guarantee or indication of future results, and no representation or warranty, express or implied, is made regarding future performance of any financial instrument mentioned in this Report.
Any benchmark shown herein is shown for illustrative purposes only. No index benchmark is available for direct investment. It may not be possible to replicate the returns of any index, as the index may not include any trading commissions and costs or fees, may assume the reinvestment of income, and may have investment objectives, use trading strategies, or have other materials characteristics, such as credit exposure or volatility, that do not make it suitable for a particular person. This is not an offer or solicitation for the purchase or sale of any security, investment, or other product and should not be construed as such. References to specific financial instruments and to certain indices are for illustrative purposes only and provided for the purpose of making general market data available as a point of reference only; they are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities. Investing in securities and other financial products entails certain risks, including the possible loss of the entire principal amount invested, as the value of investment can go down as well as up. You should obtain advice from your tax, financial, legal, and other advisors and only make investment decisions on the basis of your own objectives, experience, and resources.
Brenton Point accepts no liability for any loss (whether direct, indirect or consequential) occasioned to any person acting or refraining from action as a result of any material contained in or derived from this Report, except to the extent (but only to the extent) that such liability may not be waived, modified or limited under applicable law.
This Report may provide addresses of, or contain hyperlinks to, Internet websites. Brenton Point has not reviewed the linked Internet website of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for your convenience and information, and the content of linked third party websites is not in any way incorporated herein. Recipients who choose to access such third-party websites or follow such hyperlinks do so at their own risk.
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Source of data and performance statistics: Bloomberg L.P. and Factset Research Systems Inc.
©Brenton Point Wealth Advisors LLC 2019

Brenton Point - Careers

Michael Schaus

Director of Market Research

Michael Schaus is the Director of Market Research for Brenton Point Wealth Advisors and Zweig-DiMenna. Since joining Zweig-DiMenna in 1992, his focus has been on macroeconomic research, the analysis of…

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