As humans, it seems like we are always looking to the past or the future to give us some idea of what may occur. For example, we have the ‘Back to the Future’ trilogy about time travel or even the Magic 8 ball from 1950 ‘telling’ us what the future holds. However, what we do not realize is we always have a ‘crystal ball’ around us. In our economy, this ‘crystal ball’ can be called something different though, it can be called a leading indicator.
A leading indicator is a piece of economic data that can help to predict future movement or change in something of interest such as the economy or markets. An example of a leading indicator would be the number of jobless claims. With this information, investors could believe the economy is weakening with a higher initial jobless claim number or strengthening with decreasing initial jobless claim number.
You have probably heard my father discuss his ‘Cars and Bags’ indicator. While not an official leading indicator, by looking at mall parking lots you can see if the parking lots are full and then watch to see if people are leaving the stores and walking to their cars with an arm full of bags. The more cars and bags the better, as this could mean more spending was occurring. However, this indicator will not be as indicative of spending this year due to the virus and more people shopping online. Maybe a different indicator could be watching delivery trucks to see how late into the evening they are delivering packages.
Some examples of the ‘crystal ball’ all around us are:
· I spoke with a contractor who is booked for major kitchen and bathroom remodels through June 2021.
· A client, whose children work in the hospitality industry in Scottsdale, is starting to see her children have additional hours added to their schedule.
· I dropped some clothes off at the dry cleaner and while still slower than usual, they are starting to see a pickup in business.
· Yesterday, I drove Francis up to his swim lessons during rush hour along a normally busy freeway, which had significantly less traffic than usual.
These four different data points, taken by themselves, could indicate one thing, but taken as a collection of data points has the potential to paint a picture of what is going on in the economy well before they are reported through economic reports.
Moving to the events of this week, as I write this week’s letter, the results of the election are still unknown. The Presidential, as well as numerous Congressional contests have yet to be called, however there is starting to be some idea of what the government make-up could look like. Currently, it is looking as if there will be a Democrat in the White House with a split Congress where Democrats control the House, and the Republicans control the Senate.
We have received questions about the performance of the S&P 500 depending upon what the government looks like. The chart below shows the average annual returns of the S&P 500 under various scenarios. As it is historical data, there is no guarantee of future results.
As you can see, a Democratic President with a split Congress has historically been positive for the market with an average return of 15.9%. Additionally, you can see various other scenarios. If there is something in common, under any scenario, the market as measured by the S&P 500 has shown to be positive. This means, the market, will find ways to grow no matter who is in office.
If we remove the President from the equation and only focus on Congress, how do the market and economy perform?
The chart above shows the average annual S&P 500 return and the average Gross Domestic Product (GDP) growth. As you can see, under a split Congress, the S&P 500 has historically performed the best. When looking at the GDP, while the growth is the least under a split Congress, it is only down slightly. One potential rationale for the success of the market under a split Congress is there are checks and balances where one party is unable to get their entire platform passed.
If historically the market and economy have shown growth, no matter who is in power, what do we believe we need to be watching currently?
· COVID-19: When is a vaccine going to be released and are there additional lockdowns. A successful vaccine would provide tailwinds for the economy, while new lockdowns would be hard on the economy.
· Stimulus: When and how much? Be it during the lame-duck session or late January 2021, the additional stimulus will most likely occur.
· Consumer Spending: Is the consumer spending and if so, where? Are they buying needs or wants? This holiday season will give us an indication of the health of the consumer.
· Employment: The US Bureau of Labor Statistics reported the economy added 638,000 jobs in October and the unemployment rate dropped a full percentage point to 6.9%. We want to continue to see new jobs added and the unemployment rate decrease as this means a strengthening economy.
As you go about the upcoming days, remember you have data all around you. Take a few extra minutes to see if people are talking about being busy at work or if you see delivery trucks working later into the evening as these can be key data points showing the economy is opening up and consumer spending is getting stronger.
I look forward to talking with you soon.
Chris Zeches, CFP®