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While I struggle with stocks, my friend sends me “The Wisdom.” It’s all about the midterms, dummy

The Dow dropped a whopping 608 points on Wednesday culminating in a 1943 point drop in the past month.

I freaked.

Was this just a return of volatility or something more sinister?

My worry was that we were at the end of the our boom. By end Wednesday we were negative on the year.

But then came yesterday and a bounce of 401 points. This year’s volatility is stomach churning:

This year’s volatility is dramatically different to last year when it was straight up.

What’s different? Something has changed in 2018. My brilliant investor friend, Peter W., told me of a Wall Street Journal article he had pinned to his office wall in May, a scant five months ago.

Here’s the article. It explains all:

Why Stocks Can’t Wait for the Midterms to Be Over
A stock-market pattern that not too many investors talk about could explain why gains are a struggle now-but will be easier after the election


The Dow throughout history has produced an annualized gain of just 1.4% in the six months before midterm elections, but 21.8% in the six months after. ILLUSTRATION: BRIAN STAUFFER FOR THE WALL STREET JOURNAL

By Mark Hulbert,
May 6, 2018 10:19 p.m. ET

The stock market is likely to struggle between now and the Nov. 6 midterm elections.

And it isn’t because stocks favor one party or the other.

It’s because investors hate uncertainty, and these elections create a healthy dose of just that. If anything, this year’s election season appears to be creating an above-average amount of uncertainty, given the particularly large number of Republicans who have already announced that they won’t run for re-election-most prominently House Speaker Paul Ryan. There currently is a 67% probability that the Democrats will win back control of the House in this fall’s elections, for example, according to PredictIt, an online betting website.

There is a silver lining, however, for investors: The stock market should perform especially well in the six months following the elections, regardless of the outcome. That’s because, no matter the results, this pre-election uncertainty will at least be resolved.

These are the findings of a recent study conducted by Terry Marsh, an emeritus finance professor at the University of California, Berkeley, and chief executive officer of Quantal International, a risk-management firm for institutional investors, and Kam Fong Chan, a senior lecturer in finance at the University of Queensland in Australia.

They found that ever since the Dow Jones Industrial Average was created in the late 1890s, it has produced an annualized gain of just 1.4% in the six months before midterm elections, in contrast to a 21.8% annualized return in the six months thereafter.

Their research holds other potentially significant findings. For one thing, this six-months-down and six-months-up pattern isn’t as pronounced before and after presidential elections. And the midterm pattern can’t be explained by the conventional wisdom about how the November-through-April period is generally better for investors than the May-through-October period. In fact, the researchers found, the six-month down-and-up cycle holds true only in midterm-election years.

Measuring uncertainty

Why are the midterms so significant? The professors point to an economic-policy uncertainty index created by three finance professors: Scott Baker of Northwestern University, Nick Bloom of Stanford University and Steven Davis of the University of Chicago.

The index, which was calculated back to 1900, measures the extent of economic uncertainty driven by politics. It was constructed from article searches in six key newspapers for any instances in which the words “uncertain” or “uncertainty” were coupled with the words “economic,” “economy,” “business,” “commerce,” “industry” or “industrial” and one or more of the following terms: “Congress,” “legislation,” “White House,” “regulation,” “Federal Reserve,” “deficit,” “tariff” or “war.” The more sentences in these six newspapers that satisfied these criteria, the higher the index.

Profs. Marsh and Chan found that this uncertainty index tends to rise significantly in the six months before midterm elections and then fall just as much in the six months thereafter, and that higher uncertainty correlates with lower stock returns and vice versa. That’s because, Prof. Marsh says, it’s entirely rational for investors as a group to pay less for stocks as uncertainty increases and vice versa.

To explain why, he asks us to imagine two different market scenarios. The first pays you back at least $99 but no more than $101, while the second pays you anywhere between $50 and $150. Even though their average payout is the same, you would still pay a lot more to invest in the first scenario (close to $99, for example), since its payout is far less uncertain. The same principle applies in the stock market, he says.

Dead ‘presidential pattern’

If the ups and downs are driven by political uncertainty, you might expect the pattern to be even more pronounced before and after presidential elections. However, the professors found that isn’t the case: Those increases and dips aren’t as sharp as they are for midterms.

That contradicts what many experts have contended over the years. According to their old theory, the stock market should perform better as a presidential election day approaches, because an incumbent of either party will do anything to win re-election. And that means striving to make the economy be strongest as voters go to the polls.

However, the data just don’t show that, and Profs. Marsh and Chan invite political scientists to explore why that is. Regardless, they found that the only statistically significant pattern related to a presidential cycle is the one before and after the midterm election. The fourth year of the presidential term, which should be the strongest of the four if that old theory was correct, is actually no better than the average of all years.

No Halloween party

But what about another piece of traditional wisdom: “Sell in May and go away,” also known as the “Halloween indicator”? These old saws say that the stock market is far stronger over the six months between Halloween and May Day than it is over the other half of the year.

But Profs. Marsh and Chan found that this six-months-off, six-months-on pattern exists only before and after midterms. In the other three years of the presidential term, there on average is no significant performance difference between these two six-month periods. Other than in midterm years, uncertainty doesn’t rise and fall in predictable ways.

In other words, the Halloween indicator wouldn’t exist but for midterm-election years.

Fortunately for investors who were looking forward to selling in May and going away, history says the next six months are likely to be a rough period for stocks, and that the stock market over the subsequent six months, from Halloween to May Day of 2019, is likely rise significantly. But if the future is like the past, you won’t get another chance to exploit this seasonal pattern until 2022.

Mr. Hulbert is the founder of the Hulbert Financial Digest and a senior columnist for MarketWatch. He can be reached at reports@wsj.com.
The article appeared in the May 7, 2018, print edition as ‘Why Stocks Can’t Wait For the Midterms To Be Over.’ Click here 

Depressing stuff to read on the weekend

If you have a mind to read words over the weekend that suggest that long-term investing is dead or at the very least mauled, here’s a depressing selection:

+ Paul Volcker, at 91, Sees ‘a Hell of a Mess in Every Direction’

The former Fed chairman, whose memoir will be published this month, had a feisty take on the state of politics and government during an interview.

Click here.

+ ‘This is an authoritarian era’ – and investors should be worried, says Richard Haass

— Council on Foreign Relations president Richard Haass believes an impending ‘democracy recession’ poses a direct risk to investors and proponents of individual liberties alike.
— The veteran U.S. diplomat outlined why he was concerned about the direction of many governments today, and what it could portend for those engaged in the markets.
–And investors should be worried, Haass warned – particularly if they are thinking of long term investments.

Click here. 

+ Mikhail Gorbachev: A New Nuclear Arms Race Has Begun.
President Trump says he plans to withdraw from a nonproliferation treaty that I signed with Ronald Reagan. It’s just the latest victim in the militarization of world affairs.
By Mikhail Gorbachev, former president of the Soviet Union.

Click here.

Greatest Idea Ever

In our house, we lose years of sleep looking The Remote. Hence it’s time to have His and Hers models. Here are two DirecTV remotes. You can buy remotes for all systems — including DirecTV and FiOS.

Only $20.99 for these two DirecTV. Click here.

This will bring a tear to your eye. It’s a wonderful story.

From Flight Attendant Jerry Brown on Delta Flight 15 about what happened to her flight as a result of 9-11:

On the morning of Tuesday, September 11, we were about 5 hours out of Frankfurt, flying over the North Atlantic. All of a sudden the curtains parted, and I was told to go to the cockpit, immediately, to see the captain.

As soon as I got there I noticed that the crew had that “All Business” look on their faces. The captain handed me a printed message. It was from Delta’s main office in Atlanta and simply read:

“All airways over the Continental United States are closed to commercial air traffic. Land ASAP at the nearest airport. Advise your destination.”

No one said a word about what this could mean. We knew it was a serious situation and we needed to find terra firma quickly. The captain determined that the nearest airport was 400 miles behind us in Gander, Newfoundland.

He requested approval for a route change from the Canadian traffic controller and approval was granted immediately — no questions asked.

We found out later, of course, why there was no hesitation in approving our request.

While the flight crew prepared the airplane for landing, another message arrived from Atlanta telling us about some terrorist activity in the New York area. A few minutes later word came in about the hijackings.

We decided to lie to the passengers while we were still in the air.

We told them the plane had a simple instrument problem and that we needed to land at the nearest airport in Gander, Newfoundland, to have it checked out. We promised to give more information after landing in Gander. There was much grumbling among the passengers, but that’s nothing new.

Forty minutes later, we landed in What is good for the goose is good for the What is good for the goose is good for the gander. Local time at Gander was 12:30 PM, versus 11:00 AM EST.

There were already about 20 other airplanes on the ground from all over the world that had taken this detour on their way to the U.S. After we parked on the ramp, the captain made the following announcement:

“Ladies and gentlemen, you must be wondering if all these airplanes around us have the same instrument problem as we have. The reality is that we are here for another reason.” Then he went on to explain the little bit we knew about the situation in the U.S. There were loud gasps and stares of disbelief. The captain informed passengers that Ground Control in Gander told us to stay put.

The Canadian Government was in charge of our situation and no one was allowed to get off the aircraft. No one on the ground was allowed to come near any of the aircrafts. Only airport police would come around periodically, look us over and go on to the next airplane. In the next hour or so more planes landed and Gander ended up with 53 airplanes from all over the world, 27 of which were U.S. Commercial jets.

Meanwhile, bits of news started to come in over the aircraft radio and for the first time we learned that airplanes were flown into the World Trade Center in New York and into the Pentagon in DC. People were trying to use their cell phones, but were unable to connect due to a different cell system in Canada. Some did get through, but were only able to get to the Canadian operator who would tell them that the lines to the U.S. were either blocked or jammed.

Sometime in the evening the news filtered to us that the twin towers buildings had collapsed and that a fourth hijacking had resulted in a crash. By now the passengers were emotionally and physically exhausted, not to mention frightened, but everyone stayed amazingly calm. We had only to look out the window at the 52 other stranded aircraft to realize that we were not the only ones in this predicament.

We had been told earlier that they would be allowing people off the planes one plane at a time. At 6 PM , Gander airport told us that our turn to deplane would be 11am the next morning. Passengers were not happy, but they simply resigned themselves to this news without much noise and started to prepare themselves to spend the night on the airplane.

Gander had promised us medical attention, if needed, water, and lavatory servicing. And they were true to their word. Fortunately, we had no medical situations to worry about. We did have a young lady who was 33 weeks into her pregnancy. We took REALLY good care of her. The night passed without incident despite the uncomfortable sleeping arrangements.

About 10:30 on the morning of the 12th a convoy of school buses showed up. We got off the plane and were taken to the terminal where we went through Immigration and Customs and then had to register with the Red Cross.

After that we (the crew) were separated from the passengers and taken in vans to a small hotel. We had no idea where our passengers were going.

We learned from the Red Cross that the town of Gander has a population of 10,400 people and they had about 10,500 passengers to take care of from all the airplanes that were forced into Gander! We were told to just relax at the hotel and we would be contacted when the U.S. airports opened again, but not to expect that call for a while.

We found out the total scope of the terror back home only after getting to our hotel and turning on the TV, 24 hours after it all started. Meanwhile, we had lots of time on our hands and found that the people of Gander were extremely friendly. They started calling us the “plane people.”

We enjoyed their hospitality, explored the town of Gander, and ended up having a pretty good time. Two days later, we got that call, and returned to the Gander airport. Back on the plane, we were reunited with the passengers and found out what they had been doing for the past two days. What we found out was incredible.

Gander and all the surrounding communities within about a 75 Kilometer radius had closed all high schools, meeting halls, lodges, and any other large gathering places. They converted all these facilities to mass lodging areas for all the stranded travelers. Some had cots set up, some had mats with sleeping bags and pillows set up.

ALL the high school students were required to volunteer their time to take care of the “guests.” Our 218 passengers ended up in a town called Lewisporte, about 45 kilometers from Gander where they were put up in a high school. If any women wanted to be in a women-only facility, that was arranged. Families were kept together. All the elderly passengers were taken to private homes.

Remember that young pregnant lady? She was put up in a private home across the street from a 24-hour urgent care facility. There was a dentist on call, and both male and female nurses remained with the crowd for the duration.

Phone calls and e-mails to the U.S. and around the world were available to everyone once a day. During the day, passengers were offered “Excursion” trips. Some people went on boat cruises of the lakes and harbors. Some went for hikes in the local forests. Local bakeries stayed open to make fresh bread.

Food was prepared by all the residents and brought to the schools for the “guests” there. Other guests were driven to restaurants of their choice and offered wonderful meals.

Everyone was given tokens for local laundromats to wash their clothes, because checked luggage remained on each aircraft. In other words, every single need was met for those stranded travelers.

Passengers were crying while telling us these stories. Finally, when they were told that U.S. airports had reopened, they were delivered to the airport promptly and without a single passenger missing or late. The local Red Cross had all the information about the whereabouts of each and every passenger and knew which plane they needed to be on and when all the planes were leaving. They coordinated everything beautifully. It was absolutely incredible.

When passengers came on board, it was like they had been on a cruise. Everyone knew each other by name. They were swapping stories of their stay, impressing each other with who had the better time. Our flight back to Atlanta looked like a chartered party flight. The crew just stayed out of their way. It was mind-boggling. Passengers had totally bonded and were calling each other by their first names, exchanging phone numbers, addresses, and email addresses.

And then a very unusual thing happened. One of our passengers approached me and asked if he could make an announcement over the PA system. We never, ever, allow that. But this time was different. I said “of course” and handed him the mike. He picked up the PA and reminded everyone about what they had just gone through in the last few days. He reminded them of the hospitality they had received at the hands of total strangers. He continued by saying that he would like to do something in return for the good folks of Lewisporte.

“He said he was going to set up a Trust Fund under the name of DELTA 15 (our flight number). The purpose of the trust fund is to provide college scholarships for the high school students of Lewisporte. He asked for donations of any amount from his fellow travelers. When the paper with donations got back to us with the amounts, names, phone numbers, and addresses, the total was for more than $14,000!

“The gentleman, a MD from Virginia, promised to match the donations and to start the administrative work on the scholarship. He also said that he would forward this proposal to Delta Corporate and ask them to donate as well.

As I write this account, the trust fund is at more than $1.5 million and has assisted 134 students in college education.”

I just wanted to share this story because we need good stories right now. It gives me a little bit of hope to know that some people in a faraway place were kind to some strangers who literally dropped in on them.

It reminds me and hopefully you how much good there is in the world. “In spite of all the rotten things we see going on in today’s world this story confirms that there are still a lot of good people in the world, and, when things get bad, they will come forward.”

HarryNewton
Harry Newton, who eyed last night’s “disappointments” from AMZN and GOOGL. The earnings were spectacular. I’d like to see those critical BubbleVision talking heads run a company of any size and meet their heady expectations. I think the prices today (Friday) will not fall to the extent they did after hours last night. But, I do admit, futures, as I finish this column, look pretty bleak, especially for tech. My head cold is still miserable. Time for more hot tea and more lemon.

  • J. Browser

    I think what the experts, and you, fail to take into consideration when making market predictions is that the president of the United States is mentally ill. Deep down investors know he’s nuts and anything could happen including war with North Korea, withdrawing from NAFTA, 90% tariffs on China, enormous tariffs on the U.K. because some British leader pisses Trump off, etc., etc. Trump made a huge mistake in firing Janet Yellen but then, he couldn’t keep her since she was hired by the black guy. (Obama.) I have zero doubt that the market would be doing better if Hillary Clinton was president. DEspite her shortcomings – and there are many – at least she’s mentally stable and not a complete loon. Rural America and blue collar, uneducated voters put Trump in office not knowing any better and now we’re left with this mess for the rest of our lives because even after 8 years Trump
    s not leaving.

  • mark

    Havent been on this site for quite a while. SOS nothing of value. Tell us Harry, ru still censoring your comments and using all those aliases for ur talking points here? You remind me of this 60’s song “Lonely, Im Mr Lonely, I Have No Buddy…
    Mean while ur fang stocks are taking a dump.

  • Lucky

    Very moving story about Gander…I spent a few days there some years back for a Lyons mid-winter convention and found the people to be absolutely exceptional. Gander people call themselves “Goofy Newfies” and laugh at themselves frequently. Gander people are indeed very special people.

  • Bruce Miller

    LOL Harry,

    At 91 Paul Volcker be like Humpty Dumpty…afraid that any which way he falls there’ll be a mess.