Go, Cubs, Go!!

By the end of last week, one streak got broken while another was continuing.  The Chicago Cubs won a World Series for the first time in 108 years.  In classic Cubs style, they frustratingly fell behind 3 games to 1.  After they recovered from this deficit, they squandered a lead in the decisive game that had fans trembling as they relived the past curses of the billy goat, the black cat and Steve Bartman.  Defying all doubters, the Cubs won in extra innings of the 7th game breaking a century long dry spell without a championship.
The other streak involves the stock market as the S&P 500 closed the week with a 9-day losing streak which hasn’t happened in 36 years (1980).  Surprisingly, it didn’t occur during the 2008-09 financial crisis or the tech bubble burst in 2000.  Also, the decline has been orderly with no large daily drops.  Let’s hope that this market streak doesn’t challenge the Cubbies!
The market turmoil is being blamed on the election.  Specifically, the renewed FBI investigation of Hillary Clinton emails and her decline in the polls.  The markets view a Clinton administration more favorably than a Trump presidency as they think that Trump policies would likely disrupt international trade and the economy.
Beyond the mudslinging of the campaigns, the markets were also concerned over higher interest rates.  The Federal Reserve held a meeting last week and while there was no policy change, it appears more likely that the fed funds rates will be increased in December.  Aside from the central bank, the markets are not waiting.  The 10-year Treasury note’s yield closed last week at 1.78%.  The is up from below 1.6% at the beginning of October.  Perhaps the many (but incorrect) predictions of the end of the bond bull market has finally arrived.
The selloff in stocks began in early October but has accelerated in the past two weeks.  The decline broke through some important supporting trend lines on the charts.  The S&P 500 ended last week testing it’s 200-day moving average.  This line represents approximately the last 10 months of trading so it is a longer trend indicator.  Many investors get very worried if the 200-day line is broken.
The selloff has damaged the major averages’ year-to-date numbers.  This is especially true with the Nasdaq and Russell which were leaders in the 3rd quarter.
2016 YTD                                        
Dow Jones Industrial Average  +2.7%
S&P 500                                      +2.0%

Nasdaq Composite                     +0.8%

Russell 2000                                +2.4%                     
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividend.
It is interesting that the sell-off took place as 3rd quarter corporate earnings generally beat expectations.  According to FactSet Research, 85% of the S&P 500 companies have reported 3rd quarter results and 71% have beaten earnings per share estimates.  EPS growth is tracking 2.7% growth which would be the first time in a year and one-half that corporate earnings have increased!!
Despite these signs of profit growth, money continues to flow out of stock market.  Per the Investment Company Institute, an estimated net $16.3 billion was pulled out of domestic equity mutual funds in the week ending October 19th.  This represents the largest weekly equity fund outflow in over 5 years.  There has been a shift among investors from mutual funds to exchange traded funds (ETFs) so there have been regular withdrawals from mutual funds.  However, as Bespoke Investment Group points out, the total inflows into ETFs do not account for all the lost dollars from the mutual funds.
Another sign of investor pessimism is the American Association of Individual Investors’ (AAII) sentiment survey.  It has registered sub-40% bullish readings for 53 straight weeks which is the longest stretch dating back to 1987.  It would be easy to blame these developments on the election, but this trend dates back before the primaries began.  Certainly, the election has contributed to the recent accelerated outflows but it seems the public has been disliking the stock market for some time.
This week’s elections will dictate the capital markets in the short term.  The markets have traded better when the chances for a Clinton victory increase as it translates into the status quo.  A Trump triumph has many uncertainties that worry the markets.  Wednesday’s trading will likely follow this trend.
Trying to game the markets based on the election is virtually impossible.  Looking beyond this week, corporate profit growth is an encouraging development.  We’ll probably get an increase in the fed funds rate in December, but much of that is already priced in.
2016 might be an iconic year like 1969.  The stock market began with the worst start to any year in history.  The U.S. presidential primaries along with the general election will not soon be forgotten.  But the year will best be remembered as the year that the Cubs won the World Series.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance is not indicative of future results. Investing involves risks, including the risk of principal loss. The strategies discussed do not ensure success or guarantee against loss. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. Trading of derivative products such as options, futures or exchange traded funds involves significant risks and it is important to fully understand the risks and consequences involved before investing in these products. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. If assistance is needed, the reader is advised to engage the services of a competent professional
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