Misdirection in Spades
Everyone is wrong... A great supply of political misdirection... A story as old as our time... More spending to come... Should the presidential election keep you out of stocks?... History, for what it's worth... Nvidia is up 10% this week...
We've still got 11 months...
That is, until the U.S. presidential election.
And already, the talk we're hearing from the two leading candidates for the White House about the state of the U.S. economy hurts our ears.
I (Corey McLaughlin) am not taking sides, and don't need to, because there's enough evidence of misdirection to go around.
Says the sitting president: The economy is great, inflation is on the decline, and "we" created millions of jobs. In reality, more than two-thirds of the jobs "created" since 2021 were simply just recovered from the start of the pandemic... Back then, the government's unemployment rate spiked from 3.5% to 15% in two months with the "old" economy shut down. Nearly four years later, the rate is at 3.7%.
Says the other: "We have an economy that's so fragile, and the only reason it's running now is it's running off the fumes of what we did." Meaning, of course, greenlighting more than $3 trillion in stimulus programs... which helped ignite 40-year-high inflation (and hundreds of billions of dollars of fraud)... before the $2 trillion more in stimulus still to come that was pushed into law by the present administration.
Where is the debate about that? Or the U.S.'s debt-to-GDP ratio of 120%, and what it means and implies? Or that the current reported debt of $34 trillion and counting assumes the government will never make another Social Security or Medicare payment? As Stanley Druckenmiller points out, factoring in those obligations would swell the U.S. debt closer to $200 trillion.
Who cares? Or at least that's how they act. The future is someone else's problem.
In the meantime, here's what's really happening...
More government spending, it looks like. It's a story as old as time...
Suddenly, the folks in Washington, D.C. are eyeing up another possible government shutdown in 10 days... unless they can agree to spend more dollars and mortgage our future and keep running trillion-dollar deficits.
It seems they might. Over the weekend, our dear "leaders" in Congress agreed to a tentative $1.66 trillion spending agreement to keep the government open in 2024, including roughly $886 billion in defense spending.
The framework is far from a done deal, and it's still under debate by the red and blue parties. Color us shocked if Congress doesn't agree to pay itself, though. As financial author John Mauldin wrote recently in Forbes (which we read in Bill Bonner's free daily newsletter yesterday)...
We have no good choices left. It is as if we are on a trip through a desert and know for certain we don't have enough water to go back.
We have to go forward, not knowing where the desert ends.
That's the reality. Unless you want to cut Social Security and Medicare, ignore military pensions, sell the national parks, abolish departments like State and Treasury, cut the defense budget in half along with Homeland Security, Education, Labor, the Justice Department and the FBI, etc., we are going to have to live with the $2 trillion deficits.
Here's a fact I'm willing to use to make bets: The dollar has lost about 98% of its purchasing power since 1971, when the government abandoned, for good, the idea of a "sound" currency pegged to something real (gold).
The money printer has been wide open for business ever since. It's a temporary fix to call on when needed. That's a difficult addiction to break, even if it devalues everything in the long run.
A look at history, for what it's worth...
As much as it may feel and appear that "this time will be different" in politics – and maybe it will be if all hell breaks loose come November – we like to see what history suggests about future market behavior.
In this case, let's look at market performance in presidential election years. Should political uncertainty keep folks out of stocks? Our colleague Sean Michael Cummings recently published an analysis, which he shared in the free DailyWealth newsletter earlier this week...
If you're worried that election years pose a threat to your portfolio, I'd understand that logic. However, history shows that isn't the case.
To prove this, I measured how stocks performed in every election year going back to 1928.
In the 24 election years in roughly the past century, stocks have held up well...
Ho-hum. Stocks have returned about 6% in presidential-election years, in line with the annual average return of the market in about 75 other years. But as Sean continued...
There's a little more to this story than meets the eye.
First, stocks tend to underperform in the first three months of an election year. So if stocks fall through March, history suggests that's a buying opportunity and not a sell signal.
Second, it's worth noting that elections are reliably bullish. Stocks were positive in 20 of the past 24 election years... resulting in a strong win rate of 83%.
What's more, stocks returned 20% in the average up year and fell just 17% in the average down year. So we have a strong risk-to-reward setup for election years, too.
Now, I'm not saying that the year ahead contains zero political risk. With so many elections taking place, it's almost certain that we'll see some chaotic results.
But overall, the stock market reacts well to elections.
We'll see what happens this time... eventually. We could get into what potential politics, or the odds on who wins, might do for the economy and markets this year. But we'll save that and more talk for another day. The Iowa caucuses begin soon.
For now, we simply want to start with a baseline: About 100 years of history suggests that the presidential election shouldn't scare you out of stocks.
Today, the tide rose…
The benchmark S&P 500 Index was up this afternoon and closed 0.6% higher. The tech-heavy Nasdaq Composite Index and Dow Jones Industrial Average finished up 0.7% and 0.5%, respectively, while the small-cap Russell 2000 Index lagged but was still up slightly.
Elsewhere, bonds have continued their once-familiar sleepy behavior for another week, though the 10-year Treasury has edged ever so slightly higher above 4%. Tomorrow morning's release of December's consumer price index inflation data could shake things up.
Stronger-than-expected inflation data could put a dent in the market's prevailing idea of multiple Federal Reserve rate cuts in the first half of this year. Alternatively, a continued slowing or stagnant pace of inflation could encourage the thought.
In the meantime, looking even just a little bit deeper than the indexes reveals some interesting notes...
Many analysts have understandably argued that hot tech stocks like Nvidia (NVDA) can't possibly go any higher after such a big run-up in 2023.
But this "Magnificent Seven" chipmaker is back to making new highs...
This week, Nvidia has seen its best-returning string of trading days since its AI-related earnings catalyst in May of last year. Nvidia is up more than 10% this week on what appears to be no new news.
You could take this as another signal that the Magnificent Seven stocks are simply pushing the market higher... or a sign that the rest of the market has some catching up to do.
Some evidence suggests the latter... Roughly 60% of S&P 500 stocks are trading above their 200-day moving averages ("200-DMAs"), and the benchmark index's own 200-DMA has been trending higher itself since early last year after bottoming in October 2022.
Concerning warning signs about the economy abound, too, no doubt. Here's looking at skyrocketing U.S. consumer debt, or declining U.S. wholesale inventories, which were reported today... in addition to whatever is going on in Washington.
But for now, the trend for stocks is up.
New 52-week highs (as of 1/9/24): Advanced Micro Devices (AMD), Cencora (COR), Trane Technologies (TT), Sprott Physical Uranium Trust (U-U.TO), and Visa (V).
In today's mailbag, feedback on recent updates to our "Stansberry Data Monitors" – market indicators that are available to Stansberry Alliance members and Stansberry's Investment Advisory premier subscribers here... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"What a wonderful breath of fresh air! Yes, these documents are specific and easily understandable. Keep up the best work in the industry. I am going to be busy the next day or two absorbing all this concise information." – Subscriber Mark S.
All the best,
Corey McLaughlin
Baltimore, Maryland
January 10, 2024