by Gary Alexander
June 14, 2022
“I would like to say to Milton … Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”
–Fed Governor Ben Bernanke, speaking to Milton Friedman on his 90th birthday, 2002.
Last week, I showed how the Federal Reserve Open Market Committee was very active during most mid-term election years from 1962 to 1998, often causing turbulence in the markets and a change in Congressional party power, thereby fueling a market rally late in the year. I showed how the S&P 500 gained an average 50% from its low point in a mid-term election year (like this one) to the high point of the following year.
In the 21st century, the Fed seems to have learned some lessons by avoiding too much market intervention prior to elections – but the best news is that the market still took off strongly during the final quarter of most mid-term election years. Let me show you these recent examples, and then draw some tentative conclusions:
In 2002, the stock market emerged from two killer crashes resulting from the tech-stock bubble of 1999, first in 2000, and again in 2002. (The 9/11 crisis came in the middle of those two market purges.) This combined slow-motion crash took 30 months to reach bottom, falling almost 50%. The economy was not that bad in 2002, with low (1.6%) inflation and a +1.7% GDP with 6% unemployment, but Fed chair Alan Greenspan kept his powder dry during election season and only lowered rates 0.5% the day after the mid-term elections.
Then the market soared: In 2003, the S&P 500 closed the year at 1111.92, up 43% from its 2002 low.
In 2006, the new Fed Chair Ben Bernanke (serving February 2006 to January 2014) also laid low during election season. With a healthy economy (+2.8% GDP, 3.2% inflation, and 4.4% unemployment), he raised rates four times in the first half of 2006, January 31 to June 29, but he made no moves in the second half.
Then, an amazing thing happened. After the 2008 financial crisis, the Fed lowered short-term interest rates to effectively zero (a range of zero to 0.25%) for a full seven years, from December 16, 2008, to December 17, 2015 – virtually the first full seven of Barack Obama’s eight years in office, and in most of Ben Bernanke’s 8 years as Fed Chair, so there is nothing to report about the Fed’s actions during the 2010 mid-term elections.
In 2014, there is likewise nothing to report during the only year in which Janet Yellen (serving February 2014 to February 2018) was Fed Chair during a mid-term election. Rates remained frozen at zero to 0.25%.
In 2018, Jerome Powell (serving February 2018 to the present) made a blunder which impacted the elections and pushed the markets into a panic. During a quite healthy economic year (+2.9% GDP, unemployment at only 3.9%, and inflation at 2.4%), he raised rates four times – once too often, most said – during his rookie season. On the surface, this was his noble attempt to bring rates back to normal – a “normalization” process – but his third increase impacted the election, and his fourth increase tanked the stock market in December.
Powell first raised rates from 1.5% to 1.75% on March 22, then to 2.0% on June 14 and then to 2.25% barely a month before the election, on September 28, and then up to 2.50% just before Christmas, on December 20. As a result, the S&P declined almost 20% from late September to late December in a fourth-quarter swoon.
Here’s a continuation of last week’s table of market lows in mid-term election years vs. highs the next year:
As I’ve shown before, the bulk of the full-year gains in mid-term election years (since 1950) tend to come in the fourth quarter alone, with the first half of the next year marking a continuation of that upward trend.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Powell torpedoed the 2018 fourth-quarter stock market by his September and December rate increases, so that made the 2018 fourth quarter an anomaly, so I’ve taken 2018 out of both charts – above and below:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Some Lessons for Investors (and the Fed) from This 2-Week, 60-Year Survey
Now, let me conclude with four quick and easy lessons that the Fed might learn from their successes and failures during their frequent flurry of mid-term election year interest rate increases over the last 60 years.
#1: Markets Overreact to Fed Rate Increases: There is no need to stage a market panic when the Fed raises rates. The Fed is merely following market trends, after market rates rise. They are merely reflecting the actions of the bids and offers of millions of market actors in bond and currency markets in the real world. If you want to react to rising rates, react to the 10-year Treasury rate, not the Fed funds rate.
#2: The Fed Should Avoid Any Action After September 1 in Election Years. Since human beings are sheep, and we have been conditioned to think rate increases can topple kings and markets, Fed decision makers should agree not to touch the magic interest rate button after Labor Day in even-numbered years.
Now, on to some more fundamental lessons:
#3: Group Think can be Dangerous. During 2021, virtually all Fed governors and leading economists were saying inflation was “transitory” and “manageable,” while I and most economists I respect were saying the opposite. The Fed has over 300 PhD economists, but they are nearly all Keynesian economists (or policy wonks) who denigrate “monetarism.” Treasury Secretary Janet Yellen is now doing her apology tour, but in March 2021, when the Biden administration was claiming that its $1.9 trillion stimulus plan would not fuel inflation, Ms. Yellen said the inflation risk was “small and manageable.” Yellen echoed Powell in calling any risk “transitory” and said that every economist she knew felt that way. That’s “group think,” by definition. Some blame Putin or Covid, but few cited “too much money.”
#4: Fine-tuning is a fool’s errand. In the 1960s, Presidential economic advisor Walter Heller developed the concept that central planners can “fine tune” the economy to such perfection that they can prevent recessions, contain inflation, create jobs, fund both welfare and warfare (“guns and butter”), and create a virtual paradise (Great Society). How did that work out? A Vietnam quagmire, massive debts, and a decade of stagflation. Planners don’t have the power to create a Great Society or even a Pretty Good one. That’s up to citizens. Central bankers can be replaced by a computer, so just keep it simple, Geek Squad!
All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Central Banking for Dummies
Income Mail by Bryan Perry
Income Mail is on Hiatus
Growth Mail by Gary Alexander
Has the Fed Finally Learned Some Lessons?
Global Mail by Ivan Martchev
Neither Bonds nor Inflation Are Cooperating
Sector Spotlight by Jason Bodner
“Where Does the Pain Hurt Most?”
View Full Archive
Read Past Issues Here
About The Author
Gary Alexander
SENIOR EDITOR
Gary Alexander has been Senior Writer at Navellier since 2009. He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks. For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.
Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s. He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division. Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander
Important Disclosures:
Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not a solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.To the extent permitted by law, neither Navellier & Associates, Inc., nor any of its affiliates, agents, or service providers assumes any liability or responsibility nor owes any duty of care for any consequences of any person acting or refraining to act in reliance on the information contained in this communication or for any decision based on it.
Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report. Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.
None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The holdings identified do not represent all of the securities purchased, sold, or recommended for advisory clients and the reader should not assume that investments in the securities identified and discussed were or will be profitable.
Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for every investor. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.
One cannot invest directly in an index. Index is unmanaged and index performance does not reflect deduction of fees, expenses, or taxes. Presentation of Index data does not reflect a belief by Navellier that any stock index constitutes an investment alternative to any Navellier equity strategy or is necessarily comparable to such strategies. Among the most important differences between the Indices and Navellier strategies are that the Navellier equity strategies may (1) incur material management fees, (2) concentrate its investments in relatively few stocks, industries, or sectors, (3) have significantly greater trading activity and related costs, and (4) be significantly more or less volatile than the Indices.
ETF Risk: We may invest in exchange traded funds (“ETFs”) and some of our investment strategies are generally fully invested in ETFs. Like traditional mutual funds, ETFs charge asset-based fees, but they generally do not charge initial sales charges or redemption fees and investors typically pay only customary brokerage fees to buy and sell ETF shares. The fees and costs charged by ETFs held in client accounts will not be deducted from the compensation the client pays Navellier. ETF prices can fluctuate up or down, and a client account could lose money investing in an ETF if the prices of the securities owned by the ETF go down. ETFs are subject to additional risks:
- ETF shares may trade above or below their net asset value;
- An active trading market for an ETF’s shares may not develop or be maintained;
- The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track;
- The cost of owning shares of the ETF may exceed those a client would incur by directly investing in the underlying securities; and
- Trading of an ETF’s shares may be halted if the listing exchange’s officials deem it appropriate, the shares are delisted from the exchange, or the activation of market-wide “circuit breakers” (which are tied to large decreases in stock prices) halts stock trading generally.
Grader Disclosures: Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. The sample portfolio and any accompanying charts are for informational purposes only and are not to be construed as a solicitation to buy or sell any financial instrument and should not be relied upon as the sole factor in an investment making decision. As a matter of normal and important disclosures to you, as a potential investor, please consider the following: The performance presented is not based on any actual securities trading, portfolio, or accounts, and the reported performance of the A, B, C, D, and F portfolios (collectively the “model portfolios”) should be considered mere “paper” or pro forma performance results based on Navellier’s research.
Investors evaluating any of Navellier & Associates, Inc.’s, (or its affiliates’) Investment Products must not use any information presented here, including the performance figures of the model portfolios, in their evaluation of any Navellier Investment Products. Navellier Investment Products include the firm’s mutual funds and managed accounts. The model portfolios, charts, and other information presented do not represent actual funded trades and are not actual funded portfolios. There are material differences between Navellier Investment Products’ portfolios and the model portfolios, research, and performance figures presented here. The model portfolios and the research results (1) may contain stocks or ETFs that are illiquid and difficult to trade; (2) may contain stock or ETF holdings materially different from actual funded Navellier Investment Product portfolios; (3) include the reinvestment of all dividends and other earnings, estimated trading costs, commissions, or management fees; and, (4) may not reflect prices obtained in an actual funded Navellier Investment Product portfolio. For these and other reasons, the reported performances of model portfolios do not reflect the performance results of Navellier’s actually funded and traded Investment Products. In most cases, Navellier’s Investment Products have materially lower performance results than the performances of the model portfolios presented.
This report contains statements that are, or may be considered to be, forward-looking statements. All statements that are not historical facts, including statements about our beliefs or expectations, are “forward-looking statements” within the meaning of The U.S. Private Securities Litigation Reform Act of 1995. These statements may be identified by such forward-looking terminology as “expect,” “estimate,” “plan,” “intend,” “believe,” “anticipate,” “may,” “will,” “should,” “could,” “continue,” “project,” or similar statements or variations of such terms. Our forward-looking statements are based on a series of expectations, assumptions, and projections, are not guarantees of future results or performance, and involve substantial risks and uncertainty as described in Form ADV Part 2A of our filing with the Securities and Exchange Commission (SEC), which is available at www.adviserinfo.sec.gov or by requesting a copy by emailing info@navellier.com. All of our forward-looking statements are as of the date of this report only. We can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially. You are urged to carefully consider all such factors.
FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.
IMPORTANT NEWSLETTER DISCLOSURE:The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.
Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.
Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report.
FactSet Disclosure: Navellier does not independently calculate the statistical information included in the attached report. The calculation and the information are provided by FactSet, a company not related to Navellier. Although information contained in the report has been obtained from FactSet and is based on sources Navellier believes to be reliable, Navellier does not guarantee its accuracy, and it may be incomplete or condensed. The report and the related FactSet sourced information are provided on an “as is” basis. The user assumes the entire risk of any use made of this information. Investors should consider the report as only a single factor in making their investment decision. The report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. FactSet sourced information is the exclusive property of FactSet. Without prior written permission of FactSet, this information may not be reproduced, disseminated or used to create any financial products. All indices are unmanaged and performance of the indices include reinvestment of dividends and interest income, unless otherwise noted, are not illustrative of any particular investment and an investment cannot be made in any index. Past performance is no guarantee of future results.