Quarterly Market Review: Q2 2016

Can the Market Predict the Next President?

Every four years, the intersection of power and money lead Wall Street to churn out election-related research that attempts to answer how the outcomes of the presidential election will affect the stock market. Investors try to get an edge by anticipating who will win and what impact that person and/or party may have on the business, trade, regulatory and tax environment. We learn some useful trivia answers from these studies.

Historically, stock market performance has been consistently higher in the third year of a presidential term than in the first, second or fourth year, regardless of who is in office. Election year performance handily trumps (please, excuse the terrible pun!) the year following an election, perhaps as optimism by all is met with the realities that are not easy for any President to quickly change. Of course, no research would be complete without a comparison of political parties. The S&P 500 Index has gained an average of 8% in the years that a Democrat has held the highest office, compared with 5% under Republican presidents. Overall, the last 100 years have been a decidedly good period for the U.S. economy and most years show positive returns, regardless of which party held the White House.

Returns During and After Election Years

S&P 500 Index: 1928-2013

Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. Source: The S&P data is provided by Standard & Poor's Index Services Group.

Annualized Returns During Presidential Terms

S&P 500 Index: 1929-2015

Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. Source: The S&P data is provided by Standard & Poor's Index Services Group.

Returns During and After Election Years

Barclays Capital US Aggregate Bond Index: 1976-2013

Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. Source: Barclays Capital data provided by Barclays Bank PLC.

With only 56 presidential elections (22 without an incumbent) in U.S. history, there isn’t enough data to draw reliable investment conclusions; however, there are some interesting findings. Academics affiliated with the Socionomics Institute and Emory University School of Medicine found that the “social mood” of the U.S., as indicated by a rising or falling stock market, is even more powerful than economic growth, inflation, or unemployment in determining voter behavior.*

When there is an election with an incumbent, a net gain in the stock market during the three years preceding an election (i.e. positive social mood) is predictive of an incumbent’s victory (and a net stock market decline predicts the incumbent’s defeat). In fact, one independent study credits the stock market for correctly forecasting 90 percent of presidential elections—with only three exceptions since 1900.**

Other researchers have come to a similar conclusion – that elections are inherently emotional. What does that mean for investors? It’s easy to get caught up in the political news and the market’s response to whichever candidate is trending. The reality is that neither risk nor return varies significantly from the time before an election and after. As an investor, you are best served by keeping your focus on your goals, diversification, discipline and sound portfolio construction, and that’s always what is front of mind at Taurus Capital.

* Prechter, Robert R., Deepak Goel, Wayne D. Parker and Matthew Lampert. “Social Mood, Stock Market Performance and U.S. Presidential Elections: A Socionomic Perspective on Voting Results.” SAGE Open, Vol.2 No.7, November 2012.

** Fox, Lauren. “Stock Market Picks 90 Percent of Presidential Elections.” U.S. News & World Report. February 24, 2012.

Market Summary Second Quarter 2016 Index Returns

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index), US Bond Market (Barclays US Aggregate Bond Index), and Global Bond ex US Market (Citigroup WGBI ex USA 1−30 Years [Hedged to USD]). The S&P data are provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2016, all rights reserved. MSCI data © MSCI 2016, all rights reserved. Barclays data provided by Barclays Bank PLC. Citigroup bond indices © 2016 by Citigroup.

World Stock Market Performance

MSCI All Country World Index with selected headlines from Q2 2016

Graph Source: MSCI ACWI Index. MSCI data © MSCI 2016, all rights reserved. It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results.

These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news.

World Asset Classes

Second Quarter 2016 Index Returns

Looking at broad market indices, the US outperformed developed markets outside the US and emerging markets. US REITs recorded the highest returns, outperforming the broad equity market.

The value effect was positive in the US but negative in developed and emerging markets. Small caps outperformed large caps in the US but slightly underperformed in the developed and emerging markets.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2016, all rights reserved. MSCI data © MSCI 2016, all rights reserved. Dow Jones data (formerly Dow Jones Wilshire) provided by Dow Jones Indexes. Barclays data provided by Barclays Bank PLC.

Real Estate Investment Trusts (REITs)

Second Quarter 2016 Index Returns

US REITs had very strong positive returns for the quarter, outperforming the broad equity market. REITs in developed markets recorded positive returns, also outperforming broad developed equity markets indices.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones US Select REIT Index data provided by Dow Jones ©. S&P Global ex US REIT Index data provided by Standard and Poor's Index Services Group © 2016.

Select Country Performance

Second Quarter 2016 Index Returns

New Zealand recorded the highest country performance in developed markets, while Italy and Ireland posted the lowest performance for the quarter. In emerging markets, Peru and Brazil again posted the highest country returns, while Poland and Greece recorded the lowest performance.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Country performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), Russell 3000 Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding tax on dividends. MSCI data © MSCI 2016, all rights reserved. Russell data © Russell Investment Group 1995–2016, all rights reserved. UAE and Qatar have been reclassified as emerging markets by MSCI, effective May 2014.

Fixed Income

Second Quarter 2016 Index Returns

Interest rates across the US markets generally decreased during the quarter. The yield on the 5-year Treasury note fell 20 basis points (bps) to end at 1.01%. The yield on the 10-year T-note decreased 29 bps to 1.49%. The 30-year Treasury bond declined 31 bps to finish with a yield of 2.30%.

The 1-year T-bill ended the quarter yielding 0.45% and the 2-year T-note finished at 0.58%, for declines of 14 and 15 bps, respectively. The 3-month T-bill increased 5 bps to yield 0.26%, while the 6-month T-bill dipped 3 bps to 0.36%.

Short-term corporate bonds gained 1.05%. Intermediate-term corporate bonds returned 2.24%, while long-term corporate bonds returned 6.64% (Source: Barclays US Corporate Bond Index).

Short-term municipal bonds returned 0.66%, while intermediate-term municipal bonds gained 1.84%. Revenue bonds slightly outperformed general obligation bonds (Source: Barclays Municipal Bond Index).

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the Bond Buyer Index, general obligation, 20 years to maturity, mixed quality. AAA-AA Corporates represent the Bank of America Merrill Lynch US Corporates, AA-AAA rated. A-BBB Corporates represent the Bank of America Merrill Lynch US Corporates, BBB-A rated. Barclays data provided by Barclays Bank PLC. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Citigroup bond indices © 2016 by Citigroup. The BofA Merrill Lynch Indices are used with permission; © 2016 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Merrill Lynch, Pierce, Fenner & Smith Incorporated is a wholly owned subsidiary of Bank of America Corporation.

This report was prepared by Gregory Saliba.