Being Street Smart October 15/04
by Sy Harding
October 15/04
Can consumer confidence and the stock market predict elections? The Conference
Board thinks so. In July it claimed that “The election hangs on
consumer sentiment”. It noted that for the last 30 years the incumbent
party won the popular vote every time the Board’s Consumer Confidence
Index was at or above 100 on election day, while the challenger won the
three times the Index was below 100. At the time, in July, the Consumer
Confidence Index was at 101.9. But it dropped to 98.7 in August and to
96.8 in September. The update for October will be released on October
26, just a few days before the election.
Meanwhile a competing measurement of consumer sentiment, the University
of Michigan’s Consumer Sentiment Index, comes out earlier in the
month. Its latest update, the last before the election, was announced
on Friday and surprised the experts. The consensus projection had been
for a small decline to 94.0 in October from the index’s September
level of 94.2. Instead the index plunged to 87.5.
Regarding the stock market as a predictor of elections, the September
issue of the Stock Traders Almanac newsletter said, “Forget about
foreign policy. You can also throw domestic issues in the trash can along
with tax policy, space explorations, and stem cell research. Energy policy
and the environment? Useless. There is one litmus test that has predicted
the winner and loser in every election over the last 100 years. If the
Dow has risen 3.3% or more in October the incumbent party has never lost.
If the Dow has dropped 0.5% or more in October the incumbent party has
never won. . . . . The Dow can even generally foretell the fate of the
incumbent within the first week or so of October. Historically, if the
incumbent is destined to win the Dow has been up 1%, compared to an average
decline of 2% in an incumbent’s losing scenario”.
How are the stock market election indicators looking so far in October?
Inconclusive. The Dow is down roughly 1.1% so far in October.
However, investors need not despair from an investment point of view even
if the consumer confidence, and stock market, indicators do wind up predicting
the incumbent party will lose the White House. The Stock Traders Almanac
also points out that of the possible combinations, and contrary to popular
belief, the best combination for investors historically has been a Democratic
President and a Republican Congress, since it creates so-called gridlock,
which prevents either side from doing too much that is foolish. The average
annual return for the Dow under such a combination has been 11.5%. With
Republican control of both the White House and the Congress the average
annual return for the Dow was 9.3%. With Democratic control of both the
total return historically was 8.4%. The worst returns have been when a
Republican was in office and the Congress was evenly split between both
parties. Then the Dow averaged an annual loss of 1.2%.
How about that Eliot Spitzer? As New York Attorney General he has accomplished
far more in the way of leveling the playing field for investors than the
SEC, Congress, the NYSE, NASDAQ Regulation Division, and other regulators
combined. And he’s obviously not finished yet.
Over the last few years he has uncovered the corporate scandals, the brokerage
firm, investment bank, NYSE, NASDAQ, and mutual fund scandals. Just when
you thought every rock had been turned over in the financial industry
to reveal the scum beneath, on Thursday he took on the insurance industry,
alleging it is another area where customers and investors were scammed
through kickbacks, illegal payments, and self-serving deals.
On Thursday Spitzer filed suits against Marsh & McLennan, the world’s
largest insurance broker, and insurance companies American International
Group, Hartford Financial Services Group, and Ace Ltd. Insurance stocks,
particularly the stocks of the named companies, suffered large losses
on Thursday and Friday.
Investors believing the selling was overdone, and intent on picking up
the stocks at what they perceive to be bargain prices, had better be careful.
Spitzer’s allegations indicate widespread corruption affecting almost
all forms of insurance. He made it clear that other insurers and insurance
brokers could also face criminal and civil charges. His statement “Trust
me, this is day one.” should be more than enough warning for investors.
As with all the other scandals you have to wonder where were the insurance
industry regulators?
Sy Harding is president of Asset Management Research Corp., publisher
of The Street Smart Report Online at
www.streetsmartreport.com and author of 1999’s Riding The Bear
– How To Prosper In the Coming Bear Market.