Would a Republican Win Be Bullish for the Stock Market?

By Jared Dillian

I had an instant messenger conversation with one of my clients the other day. It was pretty annoying—he wrote things like “BULL MARKET, DUDE,” and harangued me about my net-short positioning. Then he started telling me that the market was going to rip if the Republicans took both houses of Congress in the midterm elections. At that point, I felt like I needed to intervene.

First of all, just about every single piece of academic research on the subject shows that the stock market (and GDP, and many other metrics) outperforms under Democratic presidents. You don’t need to look very far for a contemporary example, considering that the stock market has done a three bagger under our current leader, and the economy has recovered.

Wait, that doesn’t make any sense. The current administration is the least friendly to business and private enterprise in recent history—so why have stocks been in a prolonged bull market? There are a million reasons why, but let’s focus on the biggest and most obvious one: the Federal Reserve.

Shaping the Fed Board of Governors

Lots of people have opinions on the Fed without really knowing the Fed as an institution or how it works.
To review, there are seven members of the Federal Reserve’s Board of Governors who live and work in Washington, DC. They are presidential appointees, and their term of service is 14 years.

There are 12 regional bank presidents, who are nominated by their respective boards of directors. They are not, theoretically speaking, political appointees. Four of them at a time serve on the FOMC, on a rotational basis. The president of the New York Fed is a permanent member of the FOMC. Their term of service is five years.

In the old days, a Fed governor would serve all 14 years, but now they have to go make money on the speaker circuit, so they serve only three to five years if they are lucky. This means that a two-term president has the opportunity to “pack the court” with Fed governors of similar political affiliation over an eight-year period.

I would argue that the power to shape the Fed Board of Governors is even greater than the power to shape the Supreme Court.

Look at the current Board of Governors:

Janet Yellen
Stanley Fischer
Daniel Tarullo
Jerome Powell
Lael Brainard

There are two vacancies, but these are all Obama appointees. Yellen served as president of the San Francisco Fed before joining the Board of Governors as vice chair.

By and large, you can divide up central bankers into two camps: dovish central bankers, who prefer easy monetary policy (low interest rates) and hawkish central bankers, who prefer tighter monetary policy (high interest rates). Dovish central bankers tend to be Democrats. Hawks tend to be Republicans. It’s not a one-for-one correlation, but it’s close.

Everyone currently on the Board of Governors is a dove. (Powell is sometimes thought of as a centrist.) There are some hawks at the regional Federal Reserve banks, since the boards of directors are businesspeople and tend to appoint other businesspeople. Jeffrey Lacker, Charles Plosser, and Richard Fisher are all notable hawks. Inconveniently, though, they only end up on the FOMC once every three years.
George W. Bush packed the Fed, too (Duke, Warsh, Mishkin, Kroszner), but his appointees are all gone now. However, if they had served out their 14-year terms, they would still be around, and we would have a much more balanced Fed.

What Life Would Look Like Under a Hawkish Fed

Even though the presidential election is two years away, I think it’s worth having this conversation today. Seriously, what would happen if someone like Rand Paul became president? And Congress were solidly Republican?

Let’s start with the Fed. Yellen would not be reappointed; that is very clear. Over the course of a few years, the Board of Governors would be reshaped.

It’s hard to imagine in a day and age where every time a relatively benign stock market correction occurs, Fed officials are dropping hints of quantitative easing, but a hawkish Fed wouldn’t go for that kind of stuff. It would allow the market to purge its own excesses. It might even be a little laissez-faire.

We’ve had an interventionist Fed and an interventionist monetary policy on and off throughout the history of central banking, but especially since 1998, when the Greenspan Fed bailed out everyone during the blowup of Long-Term Capital Management (LTCM).

I remember reading articles about the “Greenspan Put” in 2000. That turned into the Bernanke Put, then the Yellen Put, and more recently, the Bullard Put. If there’s a perception that the Fed doesn’t allow the stock market to go down, it is probably because the Fed really doesn’t want the market to go down.

All kinds of conspiracy theories have blossomed from this (the Plunge Protection Team, for example), which I don’t like. But the Fed has nobody to blame but itself.

Under a hawkish Fed, valuations would be sharply lower. “Sharply” is italicized here for a reason. If we get away from QE and ZIRP and back to something resembling a normal rate environment, you’d be looking at the stock market being down 20-40%.

Would a Republican Midterm Win Be Bullish?

Aside from the Federal Reserve, a Republican administration, together with Congress, would completely reshape government, in ways that we can’t even conceive of right now. Would the resulting legislation be more business-friendly? Well, it might be more market-friendly, and market-friendly and business-friendly are two different things.

I think there is a reason that the stock market outperforms during Democratic administrations. Two, actually.

1. Republicans appoint hawkish Fed officials who tend to tank the market.
2. Republicans tend to pass supply-side legislation, which works with a long lag.

I think Reagan should get credit for the massive expansion of the ‘80s and ‘90s, and Clinton should get credit for expanding free trade, but people forget that the early years of Reagan’s presidency were very tough. Paul Volcker unleashed a hurricane-force bear market—the ‘82 recession was one of the worst on record, though the economy recovered quickly.

So, no—I don’t think it’s clear that Republicans winning the midterm elections is bullish at all, aside from what a few computer algorithms will do the day after. In fact, I think it could be the prelude to a lot of pain in the markets.

I’m sure investors will be exchanging some inadvisable fist bumps the morning after Election Day. When George W. Bush was reelected in 2004, the market went bananas, but let’s not forget that he campaigned on lower taxes on dividends and capital gains. 2016 will be very, very different.

Jared Dillian

The article The 10th Man: Midterm Elections: Would a Republican Win Be Bullish for the Stock Market? was originally published at mauldin economics

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Retirement Investing and Kitchen Table Economics

By Dennis Miller

What is it about retirement that causes confident, successful businessmen and women to lose that edge when they invest their own life savings? Many otherwise dynamic people become virtually impotent in the face of retirement investing. I have many friends who were very effective in business—folks who made sound decisions affecting how millions upon millions of dollars were spent. They would gather the facts, make a plan, and make the right call with confidence. Why was it so taxing for these same friends to manage their personal retirement accounts?


I’m a staunch advocate for gathering around the kitchen table to hash out problems and pass on life lessons. It’s where we gathered as a family to open our mail, pay the bills, and teach (and worry about) our children. I might even say that everything we needed to teach our family about economics, we taught at that kitchen table.

The secret is there is no secret. Investment gurus, stockbrokers, and talking heads like to use fancy words to dazzle. Many would have you believe their university or Wall Street pedigrees give them investing powers outside of your reach. Though many do have a little more knowledge or a little more experience, there is no need to be intimidated by the mystique.

Why? Because you already know most of what you need to know. The underlying principles for protecting and growing wealth during retirement are the same principles that allowed you to make and save that money in the first place.

When former Federal Reserve chairman Alan Greenspan would talk to Congress, many bright people would look at each other and think, “What the hell did he say?” If folks like Greenspan are so darn smart, why couldn’t they predict or prevent the Internet or real estate boom and bust? Why can’t they speak plainly? Don’t let anyone’s “elite” status overshadow your own common sense.

For the last few years, the Federal Reserve has been printing a 100 year supply of money annually. No one needs a PhD in economics to grasp the potential for high inflation. A little knowledge of history and a bit of common sense will tell you where we’re headed.

The key to using kitchen-table economics in retirement is to apply the same fact finding and research skills that made you successful in business. If you are uncomfortable making an investment decision, continue to educate yourself until you are. Of course, it’s sensible to take in input and ideas from experts. Just don’t get caught thinking they have any magic bullets.

If you ask four people to define “rich,” you would likely get four different answers. As we move into retirement, the definition tends to be more practical and realistic. “Rich” is enough money to live comfortably without countless hours of financial worry. It’s also a feeling of pride in the lifetime of work that built your nest egg and an appreciation for each and every trip you get around the sun.

How much do you have; how much do you need to earn to supplement your retirement income; and, how can you invest safely to reach that goal? Retirement investing is no more complicated than that. Simply put, it’s living within your means and protecting what you have.

If I could shout one piece of encouragement to retirees, it would be: Don’t let the fear of losing money immobilize you! Doing nothing can be just as dangerous as risking too much on a speculative or even downright foolish investment.

You may recall the old adage about the banker who never made a loan because he was afraid he might lose money. When the bank went out of business, he claimed it wasn’t his fault. After all, he never made a bad loan during his tenure.

To make your retirement money last, you have to take on some risk. There are, however, proven ways to limit that risk to manageable doses: sector, geographical, and political diversification, trailing stop losses—the list goes on. Good investors will lose money from time to time and learn from their mistakes. You just need to learn and make the right judgment call more often than not.

Don’t fret when others brag about how well they’re doing. Each year financial newsletters, mutual funds, and investment managers like to boast about how much money they’ve made their clients. Accountability is a good thing; we’re certainly proud of our own track record.

Though, when I see the list of top-performing funds ranked by the amount of annual return, my first questions are: How much did they risk to get there? Have they performed that well consistently? How much of those profits were eaten in fees?

Some mutual funds occasionally produce nice gains for their shareholders. I, however, would put my money on the well educated grandfather investing from his kitchen table in Iowa any day of the week. Why? A recent report indicated that 78% of all US domestic equity funds were outperformed by their benchmarks during the past three years. Large caps were worse, with 86% of falling short of their benchmarks.
Benchmarks are the indices in the sectors funds specialize in, respectively. In short, there are countless statistics indicating that you can invest just as well as a fund manager.

Those numbers should embolden you, not frighten you. I shared them to keep things in perspective. There is no magic wizardry, secret code, or special knowledge. All investors gather facts, make an evaluation, and then allocate some money based on what they think the future will bring. Those are skills that can be honed through education and experience by smart folks sitting at their kitchen tables or in their home offices.

I’m happy to report that the most frequent comment we receive is that our newsletter explains investments in plain English. There’s a reason for that: the investments well suited for a conservative investor’s retirement portfolio are not that complicated.

You can overcome retirement impotence. The best way to build your confidence is to learn ways to invest safely. We think teaching our premium subscribers about protective mechanisms like asset allocation, diversification, position limits, trailing stop losses, and internationalization is just as important as the individual picks in the Money Forever portfolio. If you’d like to learn more too, sign up for a no-risk trial subscription today by clicking here.

The article Kitchen Table Economics was originally published at Millers Money

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That’s kinda like grooming your position. When you have a profit in a trade, you should take your stop loss order and move it first to your break even point, and then if your trade continues to trend your way, to always protect your profit along the way. Three, discipline means following all the buy and sell signals that your trading plan or system of trade has to offer you.

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