By TIPP EDITORIAL BOARD, TIPP Insights
Presidents come in many flavors. In President Trump, we had a President who obsessed day and night about the stock market’s performance. He presided over a stock market where the S&P 500 gained 68%, the Nasdaq increased 138%, and Dow was up 57%.
Recently, Larry Kudlow, director of the National Economic Council under President Trump, aptly described the current President. Kudlow says, “President Biden likes to ridicule the stock market.”
And, it shows. We finished the third quarter on Friday.
All three major indexes are in a bear market, dropping more than 20% from their all-time highs. The S&P 500 Index posted its third consecutive quarter of losses, its longest losing streak since the global financial crisis.
The S&P 500 is down 24.8% year-to-date, its worst year-to-date performance in 20 years. The Nasdaq declined 33.2%, while the Dow dropped 21.5%.
TIPP estimates that S&P 500 capitalization has eroded $10 trillion since January this year, from $40.4 trillion in early January to 30.5 trillion at the end of September.
Among the 11 S&P 500 sectors, Energy is the only sector that posted a gain (+30.7%) since the beginning of the year. Communication services took the biggest hit (down 39.4%), followed by IT (down 31.9%), Real Estate (down 30.4%), and Consumer Discretionary (down 30.3%).
Drilling down to individual stocks, the picture is more sober. We looked at the top-30 companies in the S&P by market capitalization. Twenty-five of the 30 companies have dropped since January. Household names like Apple (-22.2%), Amazon (-32.2%), Google, whose parent is Alphabet (-34%), and Facebook, now called Meta (-59.7%), are among those suffering massive declines in their share prices.
Nowhere To Hide
Generally, when stocks perform poorly, safe havens such as bonds and gold offer solace. But not this time.
The iShares 20+ Year Treasury bond fund (TLT) is down nearly 29%. Vanguard Total Bond Market Index Fund (BND) is down 15.7%.
The iShares Gold ETF (IAU) is down 8% for the year.
Deja vu 2008. Financial stress is epidemic in Biden’s America.
Our Financial Stress index ranges from 0 to 100; the higher the number, the more the stress. A reading of 50.0 is the neutral point.
Look at the chart below to see how financial stress has risen to levels comparable to 2008.
Most people only recognize the worth of something when they don’t have it. Look at the low financial stress readings posted in Trump’s America.
The stock market volatility is a stressor for investors, in addition to inflation and recession. Generally, investors enjoyed lower stress than non-investors. But that difference has evaporated.
Digressing a bit, we believe that in 2008, amid the financial tsunami and peaking financial stress, any Democratic presidential candidate could have defeated the incumbent party’s nominee. Similarly, we believe that the high financial stress index readings now support the notion of a red wave in the November midterms.
According to a recent IBD/TIPP Poll, twenty-four percent say the stock market volatility has affected their family finances in a “major way.” And another 25% say that it has affected it in a “minor way.” Notice that our tracking shows this data’s stability over the past four months.
Safe Harbor Seekers
Bidenflation is running at 12.6%. The year-over-year CPI inflation is 8.3%. What $1,000 could buy a year ago can buy only goods worth $923.36, a loss of $76.64.
If the same $1,000 were invested in S&P 500 index fund a year ago, it would be worth 16.62% less, which is $833.8.
Compare cash $923.36 vs. S&P 500 value $833.8. Cash looks better, at least in the short run.
Nearly one in five investors (18%) say they have taken a cash position, full or partial, due to current conditions of the stock market and economy. Another 35% are seeking safer assets than before.
Notice the safety seekers were 52% in June, 54% in July, 52% in August, and 55% in September.
When asked to pick two things they feel are the best long-term investment, the top choices are savings accounts (30%) and Real Estate (22%). Stocks came in #3 at 19%, with gold at 18%.
The laws of Physics apply to economics also. Newton’s third law says that every action has an equal and opposite reaction.
Current inflation is the reaction to Biden’s fiscal policy and the Fed’s monetary policy. Ask Larry Summers, director of the National Economic Council under President Obama, who describes how Biden’s irresponsible fiscal policy was a catalyst to inflation.
For a while, Janet Yellen, the modern Nero, and the Fed misled Americans with the “transitory” inflation humbug. They are again playing the same game, refusing to acknowledge that we are in a recession, which we believe began in June or July this year.
According to data released on Friday, the government’s personal consumption expenditures index, the Fed’s preferred inflation gauge, showed a larger-than-expected increase in August.
The U.S. is in stagflation. No one can predict how bad it will be. Here again, Larry Summers concurs with our viewpoint.
The cantankerous stock market’s volatility is also a reaction to uncertain monetary policy. Keep in mind that Paul Volcker had to raise interest rates above 20% to get control of the 1980 stagflation.
While Dr. Fed gives his bitter medicine at the fastest pace in a generation to cure inflation and restore price stability, there are side effects. Fed Chairman Jerome Powell previewed the Fed’s strategy in a speech in late August: “We will keep at it until we are confident the job is done.” Powell acknowledged the side effects of its actions in that same speech. The Fed’s policies “will also bring some pain to households and businesses.”
The three catalysts to sustain a recession are the Fed policy, consumer pullback, and the negative wealth effect. Look at the side effect of Fed rate hikes in the housing sector. The average rate on a 30-year fixed-rate mortgage is 6.7%, double what it was in January.
In the meantime, cash is the king, the best option for now.
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