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Weekly Trends

Ryan Lewenza, CFA, CMT, Private Client Strategist

February 26, 2016

You’re Fired!

  • The equity markets hate uncertainty, and that’s exactly what we have in the current US presidential primaries. But with “Super Tuesday” on March 1, we should have a lot more clarity around the Republican and Democratic Presidential candidate.

  • Historically, US equities have done okduring election years, with the S&P 500 Index (S&P 500) returning 6.1% on a price return basis. However, this is below the average of 8.7% for all years, and returns have been poor for 2 nd term Presidents. In US election years for 2 nd term Presidents, the S&P 500 has returned -6%. However, it’s important to note that this average includes the 2000 and 2008 meltdowns. If we exclude 2008 (-38.5%) under George W Bush, then the average return increases to 2.8%. Therefore, we believe the bears may be overplaying this market statistic of 2 nd term Presidents.

  • From a policy perspective we believe the key issues in the election will be the economy, healthcare, environment and deficit. With the Republicans controlling both the House and Senate, a Republican Presidential win would be huge for the right, and likely result in dramatic policy changes following two terms of a Democratic President.

  • There is a lot at stake for both the markets and policy in this election. We expect market volatility to remain elevated until we get greater clarity on the party leaders. However, as the frontrunner and possible winner of the US Presidential election emerges, we expect the equity markets to stabilize and begin to move higher.

Chart of the Week US Presidential Primaries Are Contributing To Market Volatility 1,400 32 "Donald Trump"
Chart of the Week
US Presidential Primaries Are Contributing To Market Volatility
1,400
32
"Donald Trump" Story Count (LHS)
VIX Index (RHS)
r = .70
1,200
29
1,000
26
800
23
600
20
400
17
200
14
0
11
27-Feb
27-Apr
27-Jun
27-Aug
27-Oct
27-Dec
Source: Bloomberg, Raymond James Ltd.
Weekly count

50-DMA

S&P/TSX Composite

12,817.5

12,622.7

200-DMA

13,694.7

Equity Market YTD Returns (%)

Canadian Sectors

Weight

Recommendation

Consumer Discretionary

6.7

Market weight

Consumer Staples

4.7

Market weight

Energy

18.3

Market weight

Financials

38.1

Market weight

Health Care

3.0

Market weight

Industrials

8.0

Overweight

Technology

3.2

Overweight

Materials

9.5

 

Communications

5.9

 

Utilities

2.5

Underweight

  • Downtrend

Uptrend

Downtrend Uptrend
-7.4 -8.8 -6.5 -9.4 -10.7 -10 -15 S&P/TSX Small Cap S&P 500 Russell 2000 MSCI World
-7.4
-8.8
-6.5
-9.4
-10.7
-10
-15
S&P/TSX Small Cap
S&P 500
Russell 2000
MSCI World
MSCI Europe
MSCI EAFE
MSCI EM
S&P/TSX Comp
Reading Level Technical Considerations
Reading
Level
Technical Considerations

Neutral

RSI (14-day)

53.9

12,000 S&P/TSX 50-DMA 200-DMA 16,000 15,500 14,500 14,000 13,500 13,000 12,500 11,500 11,000 15,000
12,000
S&P/TSX
50-DMA
200-DMA
16,000
15,500
14,500
14,000
13,500
13,000
12,500
11,500
11,000
15,000

Source: Bloomberg, Raymond James Ltd.

Sectors are based on Bloomberg classifications

Please read domestic and foreign disclosure/risk information beginning on page 4

Raymond James Ltd. 5300-40 King St W. | Toronto ON Canada M5H 3Y2. 2200-925 West Georgia Street | Vancouver BC Canada V6C 3L2.

Weekly Trends

February 26, 2016

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Page 2 of 4

You’re Fired!

Things are starting to heat up in the US presidential primaries. Donald Trump recently won in South Carolina and Nevada, widening his lead in the Republican race. Following the South Carolina primary, the field narrowed with Jeb Bush suspending his campaign. Were this Donald Trump’s reality show The Celebrity Apprentice, Trump would surely have relished the opportunity to use his coined phrase, “You’re fired” to Jeb Bush, given their clear disdain for each other. On the Democratic side, Hillary Clinton gained momentum with a win over Barry Sanders in the Nevada caucus. Currently, Hillary has 502 delegates (2,383 needed) to Sander’s 70. While both Clinton and Trump increased their respective leads, Tuesday March 1, or “Super Tuesday” will likely be the defining moment for this election, with 11 states holding primaries. With the run to the White House picking up, we thought it would be timely to discuss the market implications of US Presidential elections and highlight the key issues at stake.

Let us be very clear at the outset that we are not endorsing any political party, and are solely looking at the equity market implications from a quantitative or historical context. With that said, we analyzed US equity returns during elections years, with the key findings outlined below:

  • Since 1945, there have been 18 US Presidential elections. On average, the S&P 500 has returned 6.1% on a price return basis during elections years, which is below the average of 8.7% for all years.

  • The odds of a positive return are higher for election years at 76% versus 70% for all years.

  • Equity returns for 2 nd term Presidents tend be poor during US election years. In US election years for 2 nd term Presidents, the S&P 500 has returned -6%. However, it’s important to note that this average includes the 2000 and 2008 meltdowns. If we exclude 2008 (-38.5%) under George W Bush, then the average return increases to 2.8%. Therefore, we believe the bears may be overplaying this market statistic of 2 nd term Presidents.

  • Finally, we examined equity returns under different combinations of Republican/Democratic Presidents, House, and Senates. With the Republicans controlling both the House and Senate, we can only have a DRR (i.e. Democratic President, Republican House and Senate) or a RRR. Under DRR combinations the S&P 500 has returned 13.3% versus RRR combinations of -1.2% since 1929.

S&P 500 Returns During Presidential Elections S&P 500 Returns Under The Different Combinations

S&P 500 During Presidental Election Yrs (1945 to 2012) S&P 500 During 2nd Term Presidental Yrs
S&P 500 During Presidental Election Yrs (1945 to 2012)
S&P 500 During 2nd Term Presidental Yrs ('52, '60, '88, '00, '08)
Trading Days
-15%
-10%
144
155
10%
-5%
0%
5%
23
232
254
243
78
56
67
34
89
210
199
188
166
133
100
45
12
122
221
177
111
1

9

DRR

13.3%

DRD 13.6% 4
DRD
13.6%
4
34 Yearly Returns Combination (Pres/House/Senate) Average % Count DDD 9.3%
34
Yearly Returns
Combination (Pres/House/Senate)
Average %
Count
DDD
9.3%

RDR

3.7%

8

20 7.1% RDD
20
7.1%
RDD

10

-1.2%

RRR

2 -18.2% RRD
2
-18.2%
RRD

Source: Bloomberg, Raymond James Ltd. Note D represents Democrat and R represents Republican. Returns are since 1929.

Weekly Trends

February 26, 2016

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Page 3 of 4

Key Issues

Below we discuss the key political issues in this US presidential election. Again, our aim is to be impartial and unbiased, as we attempt to summarize the salient positions of the parties and leading candidates. They include:

  • Economy: The economy is the central issue among voters. Specifically, stagnant wages, income inequality, high underemployment and lackluster economic growth. Both parties are presenting policies aimed at addressing middle class stagnation given median real household income of US$54,440 is at the same level as 1989. The Democrats are proposing to raise the minimum wage, provide tax cuts to middle class and small business, and increase infrastructure spending. While there is no clear consensus among the remaining Republicans, tax reform, regulatory reform, and repealing Obamacare are common views among the contenders. The frontrunner Donald Trump is advocating for a rollback of recent trade agreements, and getting tougher on trade with countries like China and Mexico.

  • Healthcare: Obamacare remains a very divisive and controversial policy. The Democrats would keep the policy, with Senator Sanders taking it further by offering universal health care, similar to Canada. The Republicans are united in their continued repudiation of Obamacare, with leading contenders supporting a repeal of the program.

  • Environment: This remains one of the more partisan issues in this race. The Democrats believe in global warming and taking more aggressive action to combat climate change. Increasing renewables, reducing subsidies to the energy industry, and reducing emissions to meet UN targets are key Democrat proposals. Broadly, Republican candidates question global warming, or if it is occurring, the believe it is likely not manmade.

  • Deficit: With the total US outstanding debt recently breaching the US$19 tln mark, this is a hot button issue, particularly for the Republican party. There is a greater focus on addressing the deficits from the Republican party, however little consensus on how to do it. On the Democrat side, Hillary Clinton has put a greater emphasis on balancing budgets and addressing the debt problem than Sanders. Sandersis proposing higher taxes on the wealthiest Americans to help deal with the debt problem.

There is a lot at stake for both the markets and policy in this election. We expect market volatility to remain elevated until we get greater clarity on the party leaders. However, as the frontrunner and possible winner of the US Presidential election emerges, we expect the equity markets to stabilize and begin to move higher.

US Household Income Is Stagnant While US Debt Hit A New Record Of US$19 Tln

US Household Median Income Adjusted For Inflation $35,000 $40,000 $45,000 $50,000 $55,000 $60,000 '04 '74 '10
US Household Median Income Adjusted For Inflation
$35,000
$40,000
$45,000
$50,000
$55,000
$60,000
'04
'74
'10
'80
'86
'98
'68
'07
'77
'89
'01
'71
'92
'95
'83
'13
US Government Debt Outstanding (in billions) $10,000 $16,000 $20,000 $12,000 $14,000 $18,000 $4,000 $2,000 $6,000 $8,000
US Government Debt Outstanding
(in billions)
$10,000
$16,000
$20,000
$12,000
$14,000
$18,000
$4,000
$2,000
$6,000
$8,000
'60
'10
'00
'90
'70
'80
'50
'85
'95
'75
'55
'65
'05
'15
$0

Source: Bloomberg, Raymond James Ltd.

Weekly Trends

February 26, 2016

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Page 4 of 4

Important Investor Disclosures

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This newsletter is prepared by the Private Client Services team (PCS) of Raymond James Ltd. (RJL) for distribution to RJL’s retail clients. It is not a product of the Research Department of RJL.

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