Markets, Oil, and Presidents

Equity markets lost momentum in the latter half of August 2015, and for the first time in four years, the S&P 500 experienced a 10% correction.  In spite of a strong October rally, volatility remained and we ended the year on a down note, with both the S&P 500 and the Dow posting losses right into the last few minutes of the year. 2016 started with a whimper, with negative returns in the first 5 days, low hopes for returns in the equity market, and rampant pessimism.  Fears over slow growth in China, escalating geopolitical tensions, and – of course- deteriorating oil prices continue to plague the markets just as they did throughout 2015.  Pessimism is extremely high, and fewer investors are feeling positive about the year ahead.

We’ve talked about the effect that a presidential election year can have on the market a few times throughout the last year, and it continues to be a factor in 2016.  This is the eighth year of Obama’s presidency, and in all cases where there’s been a year eight (dating back to 1871), market returns have been negative 60% of the time, and positive 40%.

Since 1953, when term limits were instituted, the eight year brought positive returns only 25% of the time. These statistics reflect the uncertainty surrounding election years in general, further compounded by the confirmation that the sitting president cannot return.

2016 may hold even greater uncertainty, as it is no longer a foregone conclusion – as it may have been just 12 months ago – that Hilary Clinton would be our next president.  This continued uncertainty in regards to governance and the policies that come with any change, leaves people feeling cautious and increases pessimism.

This said, it is important to point out that low levels of optimism can be good news for investors who are long in the markets, as periods such as this have historically led to outsized returns in the months that follow.

- Greg Stewart, CIO