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Election Jitters Expose Wall Street Fallacy
by John M. Curtis
(310) 204-8700
Copyright
November 1, 2014
All Rights Reserved.
Worried about upcoming U.S. Senate races tipping
control to the GOP, Wall Street weighed the outcome of Tuesday’s midterm
election. After selling off about a
1,000 points in October, markets roared back, making up all the losses, putting
the Dow Jones Industrial, S&P 500 and Nasdaq back in the black for 2014. Hitting all time highs in October of
17,350 then plunging to 16,197 Oct. 15, the wild roller coaster ended October 31
at 17,390. Wall Street’s creative
PR department likes to invent reasons for sell-offs, often blaming them on
weather, geopolitical events and now elections. When share prices inflate and price-to-earnings-ratios get out-of-hand, Wall Street
usually takes profits, triggering wholesale sell-offs that help bring stock
prices back to three- month moving averages.
Taking Walls Street’s spin machine to new heights, the latest sell offs
prompt more excuses.
When Wall Street talks of “investors,” they’re talking about the nation’s
biggest private equity, hedge and mutual funds, not day traders or small
investors, often too late to the train station to save their investments. “If we have a really uncertain situation, where the Senate is divided and candidates are
threatening recounts, that’s really not good,” said Robert van Batenburg,
director of market strategy at Newedge USA LLC in New York. Batenburg flat out tells folks that
the outcome of the Midterm Election could have major consequences on Wall
Street. Batenburg knows that
elections don’t drive Wall Street, only major funds’ profit-and-loss picture. When share prices get too high
discouraging sales, profit-taking helps to bring prices into line. Whether or not the Senate is run by Democrats or Republicans, has almost nothing to do
with why Wall Street sells off.
Whoever takes the White House, Senate or House, the same commercial
interests influence market activity, not whether or not one party holds power. Last months mini-correction had
markets adjusting downward by only 5%.
Each time the market sold off, Wall Street’s PR department gave readymade
excuses for economic slowdowns in China, political instability in Ukraine, the
recession in Europe, none had anything to do with inflated share prices no
longer attractive to private equity, hedge and mutual funds. No businessman wants to buy high and
sell low. When markets inflate, the
only way to bring price-to-earnings-ratios down is to for funds to sell-off,
take profits, and wait to buy back share at bargain prices. No private investor or day-trader
can second-guess major funds when they decide to sell-off or buy back positions.
It’s not insider trading, for funds to buy-or-sell at the same time.
Whether Democrats hold onto or lose control of the Senate to the GOP on
Tuesday has little or nothing to do with where major averages end up at year’s
end. When you consider Federal
Reserve Board Chairman Jane Yellen’s commitment to rock-bottom interest rates,
investors have nowhere to go but the stock market. Yields on money market and
certificates-of-deposits are at record lows, forcing investors to put cash into
stocks. Ending the third round of
quantitative easing [the Fed’s bond-buying program], Yellen has not intent of
raising interest rates anytime soon, driving the stock market to new heights. Barclay’s Capital sees “a new
composition is unlikely to enact changes in the near term that will alter the
direction of the equity market.”
Whoever keeps or seizes control of the U.S. Senate should make no difference on
the market’s direction in 2014 or beyond.
Barclays sees a 64% to 90% chance that the GOP will take control of the
Senate Nov. 4, giving more backing to the energy and defense sectors. “If the election results are a
surprise and Democrats keep control of the Senate, we believe the market react
would still be muted,” said a Barclay’s investor memo. All the talk about of what happens
after the election deceives investors into believing that Wall Street takes its
cues from Washington. While there
are some differences on regulator reform between the parties, the stock market
has had one of the longest bull runs under Obama in U.S. history. When he took office Jan. 20, 2009,
the Dow stood at 7,949. Ending
Friday at 17,370 shows just how much Wall Street likes Obama’s or the Fed’s
policies. Washington’s political dramas don’t affect how-and-when private equity, hedge and
mutual funds buy-or-sell stocks.
Wall Street’s decision to buy-or-sell stocks has to do with maximizing
profits, not whether or not one political party has control of Congress. No market can skyrocket without at
some point selling off. When gold
hit its all-time high of $1,920 Sept. 2, 2011, it was the law of gravity that
brought it down Friday’s close at $1,166, a whopping 60% drop. Commodities like real estate are no
exception, when inflation drives prices into the stratosphere. When real estate prices peaked in
2007 before the meltdown, prices dropped n some speculative real estate markets
like California and Nevada over 260%.
Only after commodity prices drop to affordable levels do markets start to
slowly recover. Keeping the stock
market moving forward requires periodic profit taking, to bring
price-to-earnings ratios back to reasonable levels. Politics or elections don’t have
much to do with Wall Street.
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