With the midterm elections behind us and more divisive politicking ahead of us, it looks like nothing’s changed in terms of Republicans and Democrats fighting like, well, bulls and bears.
Only, this time it’s different.
Not only are politics going to rip apart the country, perhaps like few other times in America’s history, but also bad blood boiling over into hatred will turn Americans (and bulls and bears) into raging lunatics.
The danger for investors is the sad truth that this time is different, for a lot of reasons.
What’s not different is the expectation investors have that divided government is good for the market.
That expectation is backed up by some impressive statistics.
According to Barron’s, calculations by John Lynch (LPL Financial’s Chief Investment Strategist) and Jeffery Buchbinder (LPL’s Equity Strategist) say, “The combination of a Republican president and a split Congress resulted in an average annual return of 15.7% for the S&P 500 since 1950.” And, a “Democratic president and a GOP Congress produced an 18.3% annual return.” Which Randall Forsyth of Barron’s says, “supports the conventional wisdom that Wall Street likes gridlock.”
But, that’s not the whole story.
The New Benchmark
While over any rolling five-, ten-, or fifty-year period, the S&P 500, the Dow Jones Industrials Average, the Nasdaq Composite, or any benchmark will probably show annualized gains. That doesn’t mean we’re not going to have panic selloffs, corrections, bear markets, or financial meltdowns.
Volatility is the new benchmark.
The underlying reason volatility is increasing in markets and across individual stocks – even staid stocks that aren’t typically prone to wild swings – is the mechanics of how stocks trade is different. The mechanics of how markets trade is different.
Yes, these times are different.
Stocks don’t trade at a single exchange or venue anymore. Orders to buy and sell shares are spread out over 13 U.S. registered exchanges and about 40 SEC-registered “dark pools.”
Decimalization, stocks’ ability to trade in increments of one penny, mandated by the SEC in 2001, changed the incentives specialists and market makers had to add liquidity by buying and selling millions of shares stocks for their own accounts, “to maintain fair and orderly markets.”
Because there’s less profit-making opportunity if specialists and market makers take outsized risks to make a penny a share, as opposed to taking risk in their own accounts to make “an eighth” (an eighth of a dollar, or 12.5 cents) or a quarter (25 cents) a share before decimalization, they’re not there anymore.
That liquidity spigot is closed.
The New World
Into the void, where investors don’t leave large standing orders down to sell, and more importantly, to buy shares at levels below where they’re trading. Investors used to be willing to stand in line to buy shares at lower prices, and traditional liquidity providers aren’t acting as intermediaries to maintain “fair and orderly” markets. High frequency trading and algorithm-driven buying and selling has taken over.
Those mechanics, for individual stocks and markets, manifest themselves in the frightening form of flash crashes and wildly swinging stocks and markets.
How else could the Dow, for example, a market benchmark currently around 25,600, trade up 500 points in less than five minutes, or possibly five seconds, and then fall 1,000 points five seconds later?
It’s about the mechanics.
Now, on top of that frightening reality – which no one talks about because it’s too scary to let the public know what the SEC’s allowed to happen to U.S. capital markets – we’re layering on partisan politics that are going to make years of frontal assaults and backstabbing look like a day at the beach.
And this is happening as the bull market’s looking long in the tooth, the tech darlings (the FAANG stocks) are rolling over, peak earnings talk has replaced optimism that companies can keep earning more, peak profit margin talk, trade war talk, hacking and voter fraud, and immigration insanity are the talking points moving markets.
Enjoy the afterglow investors expect from the market when a divided Congress leads them to believe steady gains are our future. Because that’s going to be a short-lived fantasy.
And things are about to get much worse.
Contrary to what the mainstream media says, America never recovered from the Great Recession. And on top of what we’ve seen this year, an economic event of similar magnitude is about to hit us – and you can bet that everyone, from the Wall Street elites to your neighbor Joe, is going to feel it.
No one wants to admit that this rapidly approaching catastrophe could soon be a reality – and fast.
But you’ll all soon see, America could be about to face an economic upheaval the likes of which no living person has ever experienced.
And this isn’t the first time I’ve told you that this is coming. So if you think you can handle potentially the biggest market crisis we’ve seen in years, then be my guest.
I suggest reading this short report, and then deciding if you’re ready to risk it all for pride.