Wow! The Tuesday evening presidential debates were almost as volatile as the stock market during the first half of this year! After rising sharply in the first few months, the markets came tumbling down on fears of higher interest rates and a bursting of the Internet bubble. The S&P 500 lost 1 percent and the NASDAQ Composite was down 2.54 percent during the first half of 2000.
Since 1980, the market has finished in negative territory over the first six months of the year five times. Only once, in 1981, was a losing first half followed by a down market for the next six months. That year, the S&P 500 lost 3.35 percent in the first half and 6.6 percent in the second half. In the other four years, the market bounced back with force roughly equal to the first half's decline. The most dramatic turnaround occurred in 1982, when the S&P 500 fell 10.56 percent in the first half but rallied a tremendous 28.31 percent in the second half to finish the year up 14.76 percent. Although we just entered the fourth quarter on Monday and still in the red, we still might finish up if given a nice rally.
August performed well with a mix of Old Economy and New Economy stocks, with a bias toward smaller names. The Dow Jones Industrials gained 6.8 percent in August while the S&P 500 returned 6.2 percent. The numbers for September are still being reviewed, but we realize it was in the negative.
From a financial markets perspective, the economic 'imbalances' cited as possible catalysts for a downturn in the economy still persist for the most part. These 'usual suspects' include the large current account deficit, low private savings ratios, tight labor markets, and high equity valuations.
The probability, however, that any one of these 'imbalances' will result in a downturn in the economy is receding. While my optimism isn't a recommendation to throw caution to the wind, the U.S. appears to be growing its way out of each of these potential problems.
At the August Federal Open Market Committee (FOMC) meeting, the committee stated that 'growth is moderating toward a pace closer to the economy's 'potential' while continued gains in work-force efficiency are containing costs and holding down underlying price pressures.' On Tuesday, the FOMC was a shade more hawkish than expected in its policy announcement. However, the general thrust of the statement was no surprise. I believe the threat of renewed Fed tightening is fairly remote given indications of easier labor markets and no better than trend growth in the third quarter.
In conjunction with my updated economic forecast, I have once again increased my corporate profit projections for 2000 and 2001. Although there have been some expected earnings disappointment announcements, I see the broad market coming in stronger than my economists had expected in the first half of 2000. Nevertheless, another year of double-digit profit growth for the S&P500 is not a forgone conclusion.
Year to date, the equity market has under-performed the bond market on both an absolute and relative basis. Furthermore, investor stock preference has shifted dramatically from the 1999 experience, with utilities, financials, and transports providing the most upside, while healthcare, technology, and telecom have been the weakest sectors. Due to a more constructive stance on the market for the remainder of the year and 2001, I recently increased my recommended exposure to equities. With a bias toward stocks, I would continue to focus on the four natural growth sectors: technology, telecommunications, financials, and healthcare for the longer term.
Lastly, we are in an election year and while past results are not indicative of future results, election years have generally been favorable for the equity market.
S&P 500 has never posted a total return of worse than -10 percent in an election year.
S&P500 has posted a gain 89 percent of the time and we haven't had a negative return since 1940.
In the last 18 presidential election years, the median total return for the S&P500 has been +16.8 percent
For more information on capital markets overviews, call me, Bill Creekbaum, CFP at 689-8720 or e-mail me at william.a.creekbaum@rssmb.com.
