The Presidential Saga
The presidential elections have a profound impact on the economy and the markets. Authors Jeffrey A. Hirsch and Yale Hirsch examine yearly what is known as the Presidential Election Stock Market Cycle in their annual review in the Stock Traders Almanac.
We have taken the Hirschs’ excellent work hopefully a step further, by going back and looking at the record of the stock market, GDP growth, debt growth, debt to GDP, gold, the 4-year stock market cycle and recessions under each of the post-war presidents from Truman (Democrat) onwards. What emerges is an interesting picture of what one might expect, depending on which party wins the White House in November.
It was, however, interesting to note that during the current president’s tenure there was no official recession. That has never happened three terms in a row. As well, there was no stock-market shakedown over more than 20% under two terms of the Obama (Democrat) Presidency. That is also unusual, and one does not normally see three consecutive terms without a market shakedown of some substance.
Finally, gold overall is down in the current presidential term, but there is no record of gold falling for two consecutive presidential terms. The next four years promise to be at least interesting and potentially dangerous.
Deutsche Bank Again
Deutsche Bank (DE:DBKGn) is being called a “zombie bank” for good reason. It has lost billions, closed branches, fired thousands, shut down businesses, pulled out of markets, and its stock has fallen 89% since 2007. Deutsche Bank also has the world’s largest derivatives book. Deutsche Bank is one of biggest banks in the world, with €1.6 trillion in assets. It is also now poorly capitalized, and doesn’t have much of a market cap.
Is it in its death knell? Will Deutsche Bank become a Lehman Brothers? Well, maybe. But more likely Deutsche Bank is going to face years of painful restructuring and could ultimately survive, if it were to sell off some of its businesses and become more niche and centered on its strengths. On the other hand, a black swan event could turn Deutsche Bank into a Lehman Brothers. Deutsche Bank should be carefully watched.
The FOMC Rate Decision
To no one’s surprise, the Fed left interest rates unchanged at its most recent FOMC meeting. They did, however, cite that risks in the economy are subsiding, and the labour market is getting tighter. Economist are only lukewarm to a possible rate hike at the September FOMC, and all agree they won’t do it at the November FOMC. However, many economists think they could hike rates at the December FOMC.
That remains to be seen, of course, but given that the world’s central banks are effectively trapped with anaemic growth and endless rounds of QE and ZIRP and NIRP, the odds of it happening are low. As well, there is the unknown as to what may come out of November’s US election. We take a look at some labour numbers and the recent new home sales that everyone has been excited about. We fail to find the excitement.
Weekly Market Review
Stocks
The US stock markets continue to hold in ‘new highs’ territory… well, at least some of the indices, led by the Dow Jones Industrials and the S&P 500. But many haven’t followed, especially the Dow Jones Transportation that is nowhere near its old highs. A main tenet of Dow Theory is that the averages must confirm each other. They don't, and that has often demarked major market turning points.
We look at the record of 4-year and 6.5-year cycle lows, and touch on the longer-term cycles. The possible 90-year cycle continues to intrigue, not that one really wants it, as it marked major depressions. August and September are traditionally weak months for the stock markets, with the bottom coming in October, but there have been run-ups into October in the past. They did that in 2007, but we all know what happened afterwards.
Currencies
The US Dollar Index has gone nowhere in the past week, and continues to hold at or under a potential break-out zone. Failure could see the US$ Index fall back to support zones. A breakout above 98 could suggest a move to 106/107. Nonetheless, currency movements were small this past week, with the USD/CAD suffering because of lower oil prices, while the euro and the Japanese yen closed higher. The British pound was down, but it was small.
Gold and Precious Metals
Gold, along with silver, platinum and palladium, responded positively to the Fed’s dovish announcement on July 27, 2016, allowing them to put in a good up week. Significant support at $1,300 has held, at least for the moment. Weak durable goods numbers also helped.
Gold is about to enter its traditional seasonal strength season that effectively lasts from roughly late July to September, or even early October, before traditional weakness sets in over the latter few months. Even during the bear years of 2011-2015, gold exhibited seasonal strength roughly from July through at least September. Will seasonal strength hold up?
Major resistance is at $1,380 to $1,400 and up to $1,430, but above that a run to $1,500/$1,550 is probable. The commercials did cut their short position down but it is still quite large, so that remains a possible drag. The gold rally is no accident, and we outline why. Gold is money.
To read the entire report, please click on the PDF file below: