It was another day of sector rotation as the DJIA traded 0.9% higher while the Nasdaq fell 1.37% and the S&P 500 was flat. Value stocks, industrials, energy, transports, and financials have caught fire, while technology and stay-at-home stocks are on ice. Small caps have also joined the rally, which is a good sign for an economic recovery.
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Another dose of good news on a potential virus antibody from Eli Lilly kept the fire hot on recovery stocks as the Dow Transports closed at another record high despite lower closes for airlines and cruise companies today. Dow theorists are smiling right now as industrial and transportation stocks are finally showing some leadership.
Outside of the stock market, consumer spending is showing some signs of frigidity just when retailers need it most. A new stimulus package is not coming until early 2021 and COVID-19 cases are on the rise nearly everywhere in the U.S.
The next few months are critical for everyone's health and the economy.
Investing with the Presidents
We've talked about how it is relatively even in terms of historical returns for equities under Republican or Democratic presidential administrations. But, as it turns out, presidential terms are usually the beginning of strong long-term returns for equities over the subsequent four years.
According to Yale's Robert Shiller, looking back to the start of every presidential term since 1920, the U.S. stock market has been higher at the end of the term about 73% of the time.
As Nick Maggiulli calculated in his note today, "This means that there was a one in four chance of a negative return over one presidential term, but also a one in six chance that the market would double (or more) within four years! It’s hard to imagine the stock market doubling in size from January 2021 to January 2025, but similar things have happened in about 15% of all presidential terms since 1920."
Why Does That Happen?
There are probably a few reasons, but the obvious ones are that new presidential administrations usually start with an open checkbook and can fire up government spending in some areas without congressional approval. Stocks like spending.
Another is that most presidents over the past century have been pro-business, which has been good for growth, good for shareholders, and good for their re-election efforts.
The most obvious reason is that we've had a lot of bull markets over the past century. We have had a few nasty bears as well. But chances are, if you were president sometime in the past century, you were riding the stock market higher throughout your term.
We've Got a Spending Problem
It seems hard to believe, but one of the strongest legs of the economic stool in 2020 is starting to wobble. Consumer spending showed signs of fatigue in October and it is starting to drag in November.
That's bad news for holiday retailers and bad news for GDP recovery, which is 70% based on consumer spending. Weekly data from Chase and its consumer card tracker showed a steep drop last week. We may have been busy fretting over the election, but there are other signs of exhaustion — especially among lower income households. Their problems intensified at the end of August when the stimulus checks ran out.
A Graver Problem for Low Income Households
According to data from a Pew Research survey, 46% of lower-income adults reported having trouble paying bills in August and 32% reported having problems paying their rent or mortgage. Lower-income adults also reported high rates of using money from savings and retirement accounts (44%), borrowing money from family/friends (35%), and receiving food from a food bank (35%).
Holiday spending is the furthest thing from their minds.