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Stock Market Jitters — Is Divisive Politics to Blame?


Photo by Amy Brothers/ The Denver Post

Let me pose a question: Over the last 20 years, which four-week period showed the most redemptions from equity funds including ETFs? OK, it must have been when market fears were high due to terrible economic fundamentals. Was it the massive bear market in 2000-2001 as the .com era imploded? No! Well then it must have been the financial meltdown in 2008-2009? Sorry, wrong again! The answer is the four-week period ended July 6, 2018. Huh?

According to Lipper (Thomson Reuters Co.), in the last four weeks, equity investors redeemed $39.2 Billion from equity funds and ETFs. It’s a level of fear unprecedented in the last twenty years and one that should pique the interest of contrarians. Historically, betting against this crowd movement, in either direction, has proven profitable. So, what could be going on?

Admittedly, by measures such as price-to-book and price-to-sales the stock market is expensive; but, this has been the story for years now. Furthermore, with earnings up 20-25% year-over-year last quarter, this quarter, and the next one, the price-to-earnings ratio is plummeting as the market stagnates. Also, there is no economic meltdown as the 2Q GDP may come in above 4% according to the Atlanta Fed. Add to that a bond market that has frustrated the bears by refusing to close above 3% on the ten-year bond. So, it must be trade tensions? Perhaps, but the 10-20% tariffs on $50 billion of goods is too small to upset a nearly $20 trillion economy and no one has cut earnings estimates due to tariffs.

But clearly some group must not be comfortable with the market or the economy. Let’s check the Bloomberg Comfort Index, which has been around for the full prior 20-year period. The Bloomberg Consumer Comfort Index is based on responses to a weekly, random-sample national telephone survey asking Americans to rate the economy, the buying climate, and their personal finances as excellent, good, not so good, or poor. It’s a 1000 consumer sample size. Overall, the index is nearing its all-time high reached in ’98-99. The overall number is 57.6 against that all-time high of 66 in 1999. For context, in the depths of the financial meltdown (6/09), the index bottomed out at 24.

Photo by Brooks Kraft LLC/Corbis via Getty Images

But inside the overall number sits the conundrum. The number for Republicans is an all-time high 77 but for Democrats the number is stuck at 50. I say stuck because Democrats have reported the same number for the last 3 years. In those 3 years, the S&P500 is up 41.6% (with dividends), there has not been a month with negative job creation, and inflation has remained subdued. This comfort gap between Republicans and Democrats is very near its all-time high which tells me that for the first time it is entirely possible that our historically divisive politics have now clouded views of the economy and personal finances. One can only expect more wacky stock market behavior if this gap continues.

For whatever reason, this kind of irrational bearishness creates opportunities in the market. Don’t be clouded by an irrational exuberance for, or hatred of, one of the political parties. Stay focused on the true fundamentals. Because right now the stock market jitters could be political.

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