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Tags: elections | recessions | fed | economy

Elections, Recessions, and the Fed

Elections, Recessions, and the Fed

(Dollar Photo Club)

Dr. Edward Yardeni By Friday, 29 July 2016 07:28 AM Current | Bio | Archive

I haven’t read "Trump: The Art of the Deal" by Donald Trump just yet. I may wait to see if he gets elected as the 45th President of the United States. I also haven’t read Hillary Clinton’s autobiography, "Living History," or her child-rearing manual, "It Takes a Village."

I doubt I’ll read them even if she wins. I hope that Trump follows up with a book titled "The Art of the Tweet." He seems to have mastered social media to his great advantage. He tweets whatever comes to his mind any time of the day. The press picks up his most outrageous comments, and voila: Free advertising!

Trump sure made headlines again at his news conference when he said, “Russia, if you’re listening, I hope you’re able to find the 30,000 emails that are missing.” Not only was he saying that Russia had hacked Hillary Clinton’s email but he also seemed to be encouraging an adversarial foreign power’s cyber-spying on a secretary of state.

Personally, I don’t like either of the candidates. They both make either Joe Biden or Mitt Romney look good, or at least normal. Nevertheless, I will vote for one or the other. I certainly won’t join the political debate in my market commentaries. I’ve said it before: My job isn’t to be a preacher; I don’t do good or evil. I am an investment strategist; I do bullish or bearish.

Several of our accounts have asked me to look at the relationships between the presidential election cycle and the business cycle, the Fed cycle, and the cycle in stock prices. Debbie and I put together a chart publication titled Presidential Election Cycles.

On balance, these elections tend to coincide with recessions and bear markets. However, there have been exceptions, and we remain bullish about the current outlook for the economy and the stock market. That’s partly because Fed officials are likely to postpone another rate hike until after the election, as they often have in the past.

Here are our quick takeaways:

(1) Recessions. Since 1947, when quarterly GDP was first compiled, there have been 17 presidential elections (Fig. 1). There were 11 recessions over this period, and almost all of them either coincided with elections or occurred shortly thereafter. There were only five instances when there was no recession between elections.

The political cycle suggests a high probability of a recession next year. I’m not sure what Hillary might do to cause one, though I’m sure she can think of something. It’s not hard to foresee a recession next year if the Donald wins and immediately declares that our trade treaties are null and void, slaps tariffs on imports from Mexico and China, and penalizes US companies that he views as having sent US jobs abroad.

(2) Fed rate hikes.
As was demonstrated by the FOMC’s statement yesterday, the Fed is in no rush to hike the federal funds rate again. The committee decided to pass on a rate hike, though the statement indicated that the economy and labor markets are doing well, inflation is likely to move closer to 2% “over the medium term as the transitory effects of past declines in energy and import prices dissipate,” and “[n]ear-term risks to the economic outlook have diminished.”

The next three meetings of the FOMC are scheduled for September 20-21, November 1-2, and December 13-14. After the statement was released, the bond market rallied and the spread between the 12-month ahead and the nearby federal funds future narrowed (Fig. 2 and Fig. 3).

Our analysis of the federal funds rate since 1954 shows that the Fed has on several occasions held off on raising this rate until after the presidential elections (Fig. 4, Fig. 5, and Fig. 6). The same is likely to happen this year. We are still thinking that none-and-done is more likely than one-and-done this year. However, a rate hike during the last meeting of the year is possible. If the “gradual” normalization of monetary policy means a 25bps increase once a year for the foreseeable future, then rates will remain awfully low for a while.

(3) Bear markets. Since 1961, there have been nine bear markets in the S&P 500. Five of them coincided with the elections, and they were among the longest of the lot (Fig. 7).

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.

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Fed officials are likely to postpone another rate hike until after the election, as they often have in the past.
elections, recessions, fed, economy
Friday, 29 July 2016 07:28 AM
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