Exclusive outtakes from industry leaders
Compiled by Thomson Reuters Proprietary Research Group
There have been five terms out of the last 16 where the last year of the term has a negative return on the DOW, and four of those terms have been during a Republican president’s term.
When we look at the previous 90 day returns before the new term, we see that the markets are generally positive (only four negative in the last 16 terms).
Elections are generally held in the first week of November. When we take the previous 60 day returns before the new term (from Nov. 20 – Jan. 20), we see that the DOW returns are even more positive, with only two terms out of 16 preceded by negative returns in the previous 60 days. This says that the lack of uncertainty after the elections usually give a boost to the market.
Only three four year terms have had negative returns. 1973-1981 (Oil crisis) and 2001-2005 (Dubya’s first term).
On average, the 90 days before the new term performs much better (3%) than the 90 days after the new term starts (1.1%).
The last three terms have started with negative returns in the first 90 days.
Since WW2, the Dems have had 7 terms and the Republicans have 8 (excluding the 2005-2009 Dubya term). The Dems have done slightly better (8.3% vs. 6.7%) in terms of average annualized returns over this period. However, these numbers are skewed in their favor because of the Clinton-Bubble era.
The stock market and the Federal Reserve have been acting like partners in a ”failing marriage” following Tuesday’s 25-basis-point interest rate cut, said James Grant, founder and editor of Grant’s Interest Rate Observer.
He was referring to the stock market’s sharp drop after the Fed’s rate action on Tuesday. Many on Wall Street thought the move was not aggressive enough to help stave off a recession.
Jim O’Shaughnessy, chairman and chief executive of O’Shaughnessy Asset Management in Stamford, Connecticut, said the sell-off in U.S. financial stocks may have run its course, and that the sector is “looking attractive again.”
The market has already seen large write-downs from financial companies, he said.
Bill Gross, chief investment officer for PIMCO, said the recent push higher in the stock market likely reflects a decline in real interest rates, and that forecasts for double-digit earnings growth next year are not realistic.
“I do think stocks are in la-la land when they start to focus on renewed double-digit profit gains in 2008. That’s just not going to happen,” said Gross, who was speaking via teleconference at Reuters Investment Outlook 2008 Summit in New York. PIMCO is the world’s largest bond fund.
PIMCO’s chief investment officer Bill Gross told the Reuters Investment Outlook 2008 Summit he expects the Federal Reserve to announce a 25 basis points cut in the federal funds rate on Tuesday afternoon but says much more will be needed.
Gross, who was speaking about three hours before the decision will be announced, said that to put a floor under the U.S. housing market, the Fed will need to cut the rate to around 3 percent and will need to get the 30-year home mortgage rate for prime borrowers down to around 5 percent. The audio of his comments is attached.
Margaret Patel, senior portfolio manager and a managing director at Evergreen Investments in Boston, said investors can expect “a good house-cleaning” when financial institutions release fourth-quarter earnings, as the housing and subprime crisis continues to take its toll on the sector.
”Everyone is going to throw in the kitchen sink in the fourth quarter,” said Patel, who spoke Tuesday at the Reuters Investment Outlook 2008 Summit in New York.
Deborah Cunningham, who manages Federated Investors’ U.S. and euro money market funds, said markets will have to wait until some six to eight weeks into the new year before European banks release their latest earnings, which could reveal some new fallout from exposure to the global credit crunch. Unlike the quarterly reporting schedule in the United States, many European banks report every six months.
That could help keep the Libor, or the London interbank offered rate, the main short-term borrowing rate in Europe, high into the first quarter, said Cunningham, who was speaking at Reuters Investment Outlook 2008 Summit in New York on Monday. A higher rate reflects a tendency toward risk aversion.
Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey, said he interpreted recent remarks by top Federal Reserve officials to mean the central bank had elevated the importance of the equities market in its decision-making during the current period of “crisis management” since the major credit crunch that hit in August.
Sowanick, who was speaking Monday at the Reuters Investment Outlook 2008 Summit in New York, also said the equity market will pay more attention to what the Fed says in its statement on Tuesday, rather than what it does on interest rates.
Mary Miller, director of fixed income at T. Rowe Price Group Inc., said the worst of the housing crisis is not over and will likely last until the end of 2008.
“It will probably be over toward the end of 2008. That’s when we’ll get some better balance between supply and demand,” said Miller, who was speaking Monday at Reuters Investment Outlook 2008 Summit in New York.
BNP Paribas Senior Bond Strategist Richard Gilhooly said the Federal Reserve could cut interest rates in the near term if the housing market remains soft. “We think, effectively, over the next three to six months the Fed will have a window to lower rates if they need to,” he told the Reuters Investment Outlook Summit in New York. The U.S. central bank has kept its benchmark overnight lending rate at 5.25 percent since June 2006. Financial markets currently show little chance of a rate cut between now and year-end. As recently as late April, rate futures priced in between one and two quarter-point Fed eases.