The Presidential Impact
The third year of a presidential cycle, which we’re in now, is historically the best year for markets. We are eager to see this week if we get a better market in this cycle like it’s happened in the past. Typically you see the increase in the markets at this time because the midterm elections are over. However, the presidential elections haven’t started yet. Everyone starts to compromise more which causes an increase in spending and the market tends to enjoy more government spending. This activity generally results in a positive year. This cycle may be a little different just because we have more people running for president than usual at this point. People usually wait until late in the year or the beginning of the fourth year of the election to announce their campaign. It’ll be interesting to see how markets react with things being different this time. Also, we had a down second year in this presidential cycle, which doesn’t typically happen. We are hoping that the market will do better than expected.
Prices at the Pump
Presidents can impact the markets and the three main presidents we’re focusing on is the president of Russia, Vladimir Putin, the king of Saudi Arabia, and our president. They’re the three biggest oil producers and the conversations between those three have really riled the oil markets. Last year we saw oil prices jump up above 20% on the Iranian sanctions. After that, Russia countered by increasing their production and we saw oil prices drop 40%. Starting this year, the Venezuelan sanctions have seen prices jump up another 20% plus. These huge swings are probably going to be the new normal largely because so much of the global production is now built into those three producers. The U.S. is now a swing producer of shale and Russia and Saudi Arabia are now are in agreement. Russia has never been a part of OPEC, but now they’ve come into the fold, so to speak. That leaves a lot of capacity in which prices can go up or down based on one or two meetings. Enjoy the downswings at the pump and maybe hold off on refilling the gas tank when you see the price go up because it’s probably not going to last. We follow that because consumer spending is 70% of our GDP and oil prices impact consumer spending in tens of billions of dollars per penny on the price of gas. It really affects the stock market and affects consumer sentiment which we saw last year. When the price of gas started shooting up, consumer sentiment came down when gas prices fell, consumer sentiment went up.
We talked about the Fed and U.S. trade talks last week. There’s another historic component that we’re sort of overlooking and that’s earnings. The expected earnings growth rate on average was 7% last September in 2018. The expected earnings growth rate on average has fallen to -0.8% for February 2019. The positive side of this is that we could see companies start to beat this expected earnings growth rate which would be great for the economy and a good, needed boost. The key is getting the companies on the upside then see a trend of them beating earning consistently. That could potentially cause upside and we may see a good rally off that. It sounds bad that when you hear it’s a good thing to see estimates come down because we’re still growing, not shrinking, but those estimates coming down makes it a little easier for companies to beat and so we may see some positive market action out of that.
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