Don't Mix Your Politics & Your Portfolio

Don't Mix Your Politics & Your Portfolio

With midterms on the horizon, questions have begun about what may happen and how elections could affect the markets. In this week’s pieces, Jake and Tim discuss the dangers of mixing politics and portfolios, how a good partner can keep you on track, as well as how markets have historically fared following US midterm elections.

Five Things You Should Know

1. Equity Markets – were higher this week with U.S. stocks (S&P 500) up 3.60% while international stocks (EAFE) rose 3.27%.
2. Fixed Income Markets – were mixed this week with investment grade bonds (AGG) down -0.58% while high yield bonds (JNK) rose 1.90%.
3. End of an Era – on Thursday, Queen Elizabeth II passed away at Balmoral Castle in Scotland. Ending 70 years atop the throne, the Queen ruled through years of global conflict, financial crises, and ushered in pivotal eras. Some 80% of Britons alive today were born under her reign and the entire world seemingly stopped upon the news with even the NYSE taking a minute of silence on the trading floor. King Charles III will take charge of the monarchy and televised funeral processions will occur next week.
4. Dollar Softens – the U.S. dollar tumbled as much as (1%) this week (the most in over a month) and sent G10 and EM currencies soaring as the euro, pound, and yen all rose more than 1%. The dollar has been surging up 10% this year, leaving other currencies grappling in the dust, but after the European Central Bank’s decision to raise rates by 75 bps, the euro was able to climb above parity. This although, is not expected to last, as “the dollar will remain dominant on risk aversion tied to slower global growth activity”, says CIBC World Markets strategist Patrick Bennett.
5. Key Insight – [VIDEO & ARTICLE] With midterms on the horizon, questions have begun about what may happen and how elections could affect the markets. In this week’s pieces, Jake and Tim discuss the dangers of mixing politics and portfolios, how a good partner can keep you on track, as well as how markets have historically fared following US midterm elections.

Insight for Investors

To be successful in any endeavor one needs to understand their shortcomings just as much as their strengths, and for investors, one such short coming is emotionally driven decision making in what to buy/sell, whether that is in one’s day to day life or their portfolio.

In our Commentary last October 1st entitled, “What’s the Value in Working with an Advisor Anyway?”, we covered some things a good advisor can help with beyond just financial planning or asset allocation. A few of the key points could be summarized in just being a good partner/friend for the emotional journey any investor takes whether triggered by things in life in general or the stock market.

As we discussed in that commentary, potential triggers that can induce counterproductive emotional decisions can be health issues, capacity issues, heartbreaking loss, or simply especially busy times of life to name a few.

One other that comes around with some regularity is politics. At any given point in time roughly half of the country is somewhat discouraged by the direction of the country because their party of choice isn’t in power. And while politicians certainly influence our world, the reality is that markets actually don’t act all that differently regardless of who is in power and the reason for that is because innovators, creators, and the hard-working people of this world carry on and pull the world forward in spite of politics and politicians.

As Jake discusses in the video above, and Brian Wesbury in the article below, history is firmly on the side of the resiliency of those types of people named above to persevere and as a consequence, for the economy and market to do the same.

By all means, embrace of life of passion (and kindness) to those causes you care deeply about, but do not let your political leanings, and corresponding sentiments based on elections, induce fear or greed that derails a well-designed plan and portfolio.

One thing that helps us be the positive partner to clients despite the political environment is because every day we get to talk to all of you, and regardless of one’s politic, see the amazing hearts, work ethics and ideas that truly define what this country is about and why we can all be hopeful of tomorrow.

Have a wonderful weekend,

Tim and the team at TEN Capital
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Silly Season

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Initially published on 8/15/2022

With less than three months left before the 2022 mid-term elections, it is officially silly season when it comes to interpreting economic reports. For many analysts it’s pretty much all politics all the time, with data seen through a political lens first, and with real unbiased economic analysis coming maybe second, if ever.

It started off with those saying we’re in a recession because, at least based on the most recent reports, real GDP declined in both of the first and second quarters of the year. Never mind that the unemployment rate has dropped 0.4 percentage points so far this year. Never mind that payrolls are up an average of 471,000 per month, while industrial production is up at a 5.2% annual rate over the first six months of the year. Never mind that “real” (inflation-adjusted) gross domestic income was up in the first quarter (we’re still waiting for Q2 data) and has just as good of a track record as real GDP.

Ultimately, those claiming a recession started already wanted to score political points against the President and no other reports besides GDP would stand between them and that goal. Our view is that a recession is coming, that monetary policy will have to get unusually tight for the Federal Reserve to bring inflation back down to its 2.0% target. In turn, tighter money should induce a recession. But that takes time and the recession hasn’t started yet.

And now it’s the President and his side of the political aisle who are abusing economic reports for their own political ends. It is entirely true that the consumer price index was unchanged in July, the first month without an increase since May 2020. Fair enough. But to use that to suggest the inflation problem is going away is nonsense on stilts.

Energy prices surged 7.5% in June and then dropped 4.6% in July. That’s it. That’s really all you need to know about inflation in the past two months. As a result, overall consumer prices soared 1.3% in June and then were unchanged in July. But a new trend this doesn’t make. Looking at both June and July, combined, consumer prices rose at an annualized 8.1% rate. That is no different at all than the 8.1% annualized increase in April and May, before the extra surge in energy prices in June then the drop in July.

If you look at the unchanged CPI in July and think the Federal Reserve is nearly done, you’re in for a big surprise. The Fed isn’t close to done. Yes, if you follow consumer prices on a year-ago comparison basis, the inflation rate likely peaked at 9.1% in June. But getting from 9.1% down to the 5 – 6% range by sometime next year is the relatively easy part. Getting from there back down near the Fed’s 2.0% target is the hard part. Rents have been increasing rapidly around the country and we don’t see that ending anytime soon, which will make it very tough for the Fed to reach its stated goal.

You’re also deluding yourself if you think the officially-called “Inflation Reduction Act” is actually going to reduce inflation. Inflation is a monetary phenomenon; the bill isn’t going to have any noticeable impact at all.

The bottom line is that, for now, the economy continues to grow and inflation remains a very serious problem. In the meantime, investors need to set aside their personal political preferences and follow economic reports as they are, not as they want them to be because of the political spin their side gets to put on them.

Data, Just the Data

Data points this week included:

• U.S. Jobless Claims – fell by 6K to a claimant count of 222K for the week ending September 3^rd. This reading was far below forecasts of 240K and plays into the narrative of a tight and strong labor force. The four-week moving average came in at 233K.
• U.S. PMI Composite – the S&P Global Composite fell to 44.6 for the month of August, which was far lower than the previous month’s reading of 47.7. This marks the second month in a row for a private sector contraction, and the biggest decline since May 2020. The service sector declined to 37.3 from 43.7, but manufacturing bumped up from 51.5 to 52.2. Employment growth for both sectors dropped to an 8-month low while input costs softened.
• U.S. Balance of International Trade – the deficit was shaved off by $10.2B to reach a 9-month low of ($70.7B), which was just slightly higher than forecasts of ($70.3B). Exports rose 0.2% to a record high of $259.3B and imports declined by (2.9%) for ($329.9B). The Chinese deficit has fallen to ($33B).
• U.K. PMI Composite – has been revised lower to 49.6 for the month of August after an initial reading of 50.9. This is down from 52.1 in July and marks the lowest reading since February of last year. A decline in manufacturing activity, paired with service sector slowdowns have produced low orders, while input costs continued to rise.
• Eurozone Retail Sales – bumped up 0.3%, MoM in July, which is a stark contrast to the (1%) dip for the month previous. Food, drink, and tobacco sales rose 0.1% with auto fuel rising 0.4%. Non-food sales fell (0.4%), and YoY retail sales have dipped (0.9%), most due to the (3.2%) contraction in June.