Gradually, Then Suddenly
Remember January 2021?... It's happening again... More on the election... The ghost of Grover Cleveland... The evidence points to volatility after November...
For the first time since January 2021...
Whenever I (Corey McLaughlin) see a report about the markets to the effect of "for the first time since January 2021," it gets my attention. So I noticed this Bloomberg post on social media platform X yesterday:
Hedge funds spent last week selling their winners at the fastest pace since the meme stock craze in January 2021 as the world's largest technology companies got hammered.
January 2021 was the height of "meme stock" mania... when Reddit traders took on Wall Street short sellers.
Not long after in February 2021, I wrote that the market was "as drunk as Tom Brady" after the Tampa Bay Buccaneers quarterback celebrated a Bill Belichick-less Super Bowl win in sloppy fashion. Stock valuations were at an eye-popping level rarely seen in market history.
What most people probably don't remember is that was also when the U.S. stock market started weakening. Around then, many popular "pandemic" speculations – like Cathie Wood's ARK funds – hit post-COVID peaks. My colleague Dan Ferris called that "top" to nearly the day in a February 11, 2021 Digest.
We also observed that market "breadth" – the number of stocks going up versus down – was deteriorating throughout 2021. And the trend was notable that July, before a bear market became clear to "everyone" in 2022.
These things happen "gradually, then suddenly," as Ernest Hemingway once said about how to go bankrupt.
No doubt, the trigger for the 2022 bear market was when the Federal Reserve indicated in late 2021 that it was finally thinking about raising rates to "fight" inflation. Volatility accelerated when Russia invaded Ukraine in February 2022. The major U.S. indexes sold off across the board from the start of the year until the pace of inflation "peaked" in October 2022.
Now, nearly two years later – and with hundreds-of-percent gains in stocks like Nvidia (NVDA) and Meta Platforms (META) – hedge funds are starting to take profits on their tech winnings or exit trades at a similar scale to early 2021. As Bloomberg reported...
The cohort "aggressively unwound risk across their long and short books" for the week ending July 19, according to Goldman Sachs Group's prime brokerage desk. The move, which came as the S&P 500 Index posted its worst weekly decline since April, is a continuation of a trend since May of funds unloading shares to have more cash ahead of the U.S. presidential election.
Is this the start of "something"? Take note.
A little more about the upcoming election...
Thank you for indulging my interest in presidential history yesterday. I hope you found some value in it. (I've shared some more history in an extended mailbag reply, so we'll keep today's main essay shorter than usual.)
The main point was that the market did well, on average, in the three months before the most recent U.S. presidential elections where a sitting president didn't seek a second term. Those were in 1928, 1952, and 1968. However, in each of these instances, recessions followed within a year of the elections.
As we said, though, these instances involved a president who was already in office for more than four years. You see, each of these presidents had first been vice presidents who took over during the previous term because the previous president died or was assassinated. We haven't seen circumstances like today in about 145 years.
The last sitting president to not seek a second term after serving less than four years in office was Rutherford B. Hayes ahead of the election in 1880. Stocks were higher in the three months before that November, too... by 8%. Not bad.
But the problems came after... with a largely down market in 1881 after President James Garfield was assassinated during his first year in office.
In other words, expect volatile times ahead.
The ghost of Grover Cleveland...
Our friend C. Scott Garliss wrote to us after reading yesterday's edition and said we should look at the market returns under President Grover Cleveland. He's the only president to serve two non-consecutive terms. Donald Trump would be the second if he wins in November.
In 1884, Cleveland became the first elected Democratic president after the Civil War. But for our purposes, we'll look at the market during his second term from 1893 to 1897.
The precedent is about as bad as you can get.
A railroad industry bubble, falling international commodity prices, an oversupply of silver, and inflation concerns culminated in bank runs around the country in the Panic of 1893 and what was referred to then as the "Great Depression"... until the Great Depression of 1929 and the 1930s came long.
Cleveland was blamed for this "earlier Great Depression," but the damage was done a few years earlier, in part because Congress passed the Sherman Silver Purchase Act in response to complaints from farmers about deflation and being unable to pay their debts.
The act required the U.S. government to buy 4.5 million ounces of silver each month with a Treasury note – which could be redeemed for silver or gold. It essentially increased dollars in circulation without a proportionate growth in physical gold, a problem since gold could be redeemed for dollars.
Silver's value crashed because of oversupply. And people who thought they wouldn't be able to turn silver dollars and bank notes into gold made a run on the banks.
Treasury reserves dwindled and the U.S. government ended up having to borrow $65 million in gold from a Wall Street banker named J.P. Morgan and England's Rothschild family.
The unemployment rate hit 25% in Pennsylvania and 35% in New York. Five hundred banks closed, and a reported 15,000 businesses failed.
The Dow Jones Index fell more than 24% in a single day on May 5, 1893. This dubious record stood until 1929. The index finished down about 24% that year. Stocks were then flat the next few years.
I'm not selling (or buying) stocks today, but the limited relevant history we have suggests rough sailing ahead... no matter who handles the Oval Office phone. However, that's not until after November.
In this week's Stansberry Investor Hour, Select Value Opportunities editor and Extreme Value senior analyst Mike Barrett joins Dan and me to talk about his process of valuing stocks, which Dan knows well...
Click here to watch the interview now... and to hear the full audio version of this week's Stansberry Investor Hour, visit InvestorHour.com or find the show wherever you listen to your podcasts.
New 52-week highs (as of 7/22/24): Alpha Architect 1-3 Month Box Fund (BOXX), Cintas (CTAS), Commvault Systems (CVLT), Intuitive Surgical (ISRG), Kinder Morgan (KMI), Motorola Solutions (MSI), NVR (NVR), Omega Healthcare Investors (OHI), Plains All American Pipeline (PAA), Pembina Pipeline (PBA), Rithm Capital (RITM), Construction Partners (ROAD), Roper Technologies (ROP), Tyler Technologies (TYL), United States Lime & Minerals (USLM), and Waste Management (WM).
In today's mailbag, feedback on yesterday's edition about the last time an incumbent president decided not to seek reelection. (It was in 1880, after several years of allegations of a "stolen election" four years earlier. Sound familiar?)... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Thanks for the history lesson today, which I very much enjoyed reading. I particularly recall studying the election of 1876 way back when." – Subscriber Sherwin R.
"Corey, Very good Monday Digest election history lesson. I did not remember or know the facts about previous presidential elections regarding candidates that bowed out after one term.
"I did not know of the contested election of Rutherford B. Hayes in 1880 in which Democrats accused him of a stolen election against Samuel Tilden. What we're seeing in politics is not new. Only social media makes it seem like it's a new problem.
"Keep up the good work." – Subscriber Frank S.
"Corey, Two points about Garfield's death. The man who shot him was not merely 'disgruntled'. He was a lunatic... And Garfield did not die from the gunshot. He died from malpractice.
"Despite the fact that hundreds, if not thousands, of veterans of the 1861-65 unpleasantness were walking around with lead still in their bodies, Garfield's doctor was obsessed with the idea of finding and removing the bullet. This was a time when germ theory was in its infancy and Garfield's doctor[s] did not believe in it. [They] endlessly probed for the bullet with unsterilized hands and instruments, succeeding only in infecting Garfield's wound, causing him to suffer a long, protracted, and unnecessary death.
"In an unsuccessful attempt to help Garfield's doctor find the bullet, Alexander Graham Bell built an early form of a metal detector..." – Subscriber R.F.G.
Corey McLaughlin comment: Thanks for the notes, R.F.G. I did some more reading on Garfield's assassination (and post-shooting treatment) today. Grim, indeed.
Another interesting note: In the 80 days that Garfield lay in a sick bed, from the time he was shot until he died, his only official act was to sign a piece of paper approving the extradition of a criminal who had escaped to Canada and was caught north of the border.
You can read a complete account of Garfield's last days, including that detail here, if you're interested...
For more than two months, the president was basically doing nothing. He was tended to by doctors in bed, was on and off morphine, and his condition worsened to the point of "blood poisoning."
On August 26, 1881 – three weeks before Garfield died – Secretary of the Interior Samuel Kirkwood told an Associated Press reporter, "I have never thought until last night that the President would die." The president's condition was grave at that point. By that afternoon, Garfield's condition "was more alarming than it has ever been," according to a daily bulletin of his health. "There is no longer hope of his recovery."
Yet Garfield remained in "power" – despite an article of the Constitution that suggests the vice president should have taken over duties – mainly because Congress was not in session during the ordeal. The federal government was essentially shut down for the summer...
It was a different time – in some ways. The sudden transition of power spurred debate about what should happen during presidential "incapacitation." Would it have been better to have a cogent president a few weeks earlier should a disaster need to be addressed? Probably.
But in some ways, it was better. I long for the time of not being bombarded by the 24-hour news cycle and the rapid changes that feel forced in our interconnected globe today. It feels like there would be less anxiety in a "slower" world – there were also a lot less people to deal with. And things still got done back then.
News of Garfield's death on the night of September 19 spread relatively quickly via telegram. Vice President Chester A. Arthur was inaugurated as president within a few hours at his home in New York City. He then repeated the oath publicly in Washington, D.C. the day after Garfield's funeral.
But life is also better today in many other ways. For instance, we like that the medical community today knows about viruses, respects the danger of sepsis, and understands the benefits of sterilization. In general, people have the chance to live longer these days.
Can't have it all, I guess.
All the best,
Corey McLaughlin
Baltimore, Maryland
July 23, 2024