Saturday, November 5, 2016

MAD Economic Review 11/5/16

"It's the economy stupid" - James Carville

Another week in the bag as we wrap up the first week of November and hit the home stretch for the remainder of an eventful 2016, but also the General Elections coming up on November 8th.

Judging by the amount of people that are fired up about this year's election, and the Cubs winning the World Series, it seems there's a lot of discontent about the powers that be. Going into this election HRC will probably be the most distrusted politician ever running for office. I mean who deletes that many emails if you weren't hiding something huge. Add in the general dislike for Trump by non-supporters and there seems to be more hate than normal going around. He is a polarizing figure at times,
but he did beat out a ton of other Republican candidates that the American people eventually shunned. That's not an easy feat to dismantle that many contenders. It was amazing to see all that unfold as one candidate after another dropped out against him.

HRC only had  one real competitor in Bernie Sanders. Speaking of him I think he was robbed of his bid, and I wonder how they convinced him to throw in the towel.  He would have offered a great contrast to Trump, and would have made this decision very difficult for a lot of people. What a shame he turned his back on the American people.

Either way this election isn't getting so much attention because of the candidates. "It's The Economy Stupid".

Coincidentally that phrase was coined by Carville during Bill Clinton's campaign for office. And coincidentally it turns out many of Bill's decisions are the reasons we have economic issues today.  But the phrase rings truer than ever.  When the economy sucks people get out and let their politicians hear it with their voice and their ballot.

Last week we received our first look at Q3 GDP. We got an initial strong showing of 2.9% growth, but remember this number will be revised a few more times. We've had 3 straight quarters of acceleration and it will be welcome to see this trend continue.

We received additional data this week with Real Disposable Personal Income, Personal Spending, Non-Farm Payrolls, and Average Hourly Earnings.

Look at this long term graph of Real Disposable Personal Income which increased by 0.3% in the latest report. Meanwhile Americans figured out how to increase Personal Spending by 0.5% according to the latest report. I guess money just keeps coming out of thin air.

Anyway the percent changes increases have been getting lower each decade for income growth. In other words the amount of income people have to spend on housing, transport, food, and fun items like vacations and gadgets is seeing weaker growth on average each decade. Remember this is the amount of money you have AFTER TAXES are taken out. What it means is taxes are taking a proportionately larger share of income, and we are seeing less wage growth.
Let's look at Average Hourly Earnings. No wonder why people feel like they are being squeezed. If your income isn't growing relative to increases in taxes and inflation you'll never feel like you're getting ahead. Now this chart for AHE doesn't go back very far, but note how wage growth was way stronger just before the recession and through it. It's only recently we've seen a decent uptick. So most people have not really participated in strong wage growth during the recovery adding to overall dissatisfaction.    Add in another "new normal" Non-Farm Payrolls with gains of 161k new jobs and you can start to see why people are dissatisfied with our politicians. If you're a Barack Obama supporter I'm sorry, but he has presided over one of the weakest economic recoveries in history, and he is leaving us with a nation more divided than when he came into office. He also did major damage to the national debt as he increased it by $8.2 trillion dollars since he's been in office. That's a far cry from his campaign promises of  debt reduction, increased prosperity, and togetherness that got everyone riled up in his favor.  I didn't vote him, but even I initially thought he would deliver on some of those promises and was hopeful he would. Just goes to show you never trust a politician I guess.

Now onto the markets. For 82 straight days the S&P 500 closed between 2100-2192.  I'm not sure if that's a record for trading within a specific point range, but it sure could be. Pretty much since Brexit the market has gone NOWHERE! Literally.  Not until this recent downturn has the market showed any life.

The Presidential Race and the Fed have been big overhangs on this market. With all that expected to be cleared up over the next 4 weeks we'll see exactly where the market will want to go finally.  Now expect some crazy moves during this time as big players re-position their books for a new President, Fed Rate hike, and general end of year trading.  Just remember the initial market reaction won't be a rubber stamp on any outcome. It can take anywhere from a few days to a few weeks for the true move to reveal itself. 

Remember I said this will be a choppy time. A Presidential Election and Fed rate hike are big deals. The market is already on edge, and there are roughly 4 weeks between the two events. Just look at the recent spike in volatility as traders and investors prepare.  It's up nearly 100% from a low of 12 in just the past few weeks. If that doesn't help explain how uneasy people are then I don't know what will.

Now the Fed did say no rate hike this week, and that was a widely expected outcome.  But for the year the market has actually eked out gains to most peoples disbelief. Despite the S&P 500 losing 1.9% this week and the Nasdaq adding a 2.9% loss itself, both are still up on the year! Albeit the gain isn't as much as it once was, but considering everything that's been thrown the markets way I find that quite impressive. Even if the market only ends up 3-4% on the year that will be quite impressive. This year was one for the record books. Now that a lot of uncertainty will officially be behind us I think 2017 will be a relief.

In my talks with clients, friends, and acquaintances many express how they think another crash is coming.  I'm not so sure.  I'll give you more insights for that in an upcoming post and maybe you'll see where I'm coming from.

IndexStarted WeekEnded WeekChange% ChangeYTD %
S&P 5002126.412085.18-41.23-1.92.0
Russell 20001187.611163.81-23.80-2.02.5

 Have a great weekend and make sure you get out and vote!

 The MAD Consultant

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