Weekly Trends

Ryan Lewenza, CFA, CMT, Private Client Strategist

February 26, 2016

Youre Fired!

Equity Market YTD Returns (%)

The equity markets hate uncertainty, and thats 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 ok during election years, with the S&P 500
Index (S&P 500) returning 6.1% on a price return basis. However, this is below
nd
the average of 8.7% for all years, and returns have been poor for 2 term
nd
Presidents. In US election years for 2 term Presidents, the S&P 500 has
returned -6%. However, its 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
nd
be overplaying this market statistic of 2 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

Weekly count

1,200

"Donald Trump" Story Count (LHS)

VIX Index (RHS)

32

r = .70

26

800

23

600

20

400

17

S&P 500

-4.1

Russell 2000

-8.8

MSCI World

-6.5

MSCI Europe

-10.7

MSCI EAFE

-9.4

MSCI EM

-7.4
-15

Canadian Sectors

-10

-5

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

Underweight

Communications

5.9

Overweight

Utilities

2.5

Underweight

Level

Reading

Technical Considerations
S&P/TSX Composite

12,817.5

50-DMA

12,622.7

Uptrend

200-DMA

13,694.7

Downtrend

53.9

Neutral

16,000
15,000
14,500
14,000
13,500
13,000
12,500
12,000
11,500

0
27-Feb

-0.5

15,500

29

1,000

200

-1.5

S&P/TSX Small Cap

RSI (14-day)

US Presidential Primaries Are Contributing To Market Volatility

1,400

S&P/TSX Comp

14

11,000

S&P/TSX
50-DMA
200-DMA

11
27-Apr

27-Jun

27-Aug

27-Oct

27-Dec

Source: Bloomberg, Raymond James Ltd.

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 | Page 2 of 4

Youre 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 Trumps reality show The Celebrity Apprentice, Trump
would surely have relished the opportunity to use his coined phrase, Youre 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 Sanders 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.
nd

Equity returns for 2 term Presidents tend be poor during US election

nd
years. In US election years for 2 term Presidents, the S&P 500 has
returned -6%. However, its 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
nd
bears may be overplaying this market statistic of 2 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

10%
5%
0%

-5%
-10%

S&P 500 During 2nd Term Presidental Yrs ('52, '60, '88, '00, '08)

1
12
23
34
45
56
67
78
89
100
111
122
133
144
155
166
177
188
199
210
221
232
243
254

-15%

S&P 500 During Presidental Election Yrs (1945 to 2012)

Yearly Returns
Combination (Pres/House/Senate)
DDD
DRD
DRR
RDD
RDR
RRD
RRR

Trading Days

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

Average %
9.3%
13.6%
13.3%
7.1%
3.7%
-18.2%
-1.2%

Count
34
4
9
20
8
2
10

Weekly Trends

February 26, 2016 | 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. Sanders is 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

$60,000

(in billions)

$20,000

US Government Debt Outstanding

$18,000

$55,000

$16,000
$14,000

$50,000

$12,000

$10,000

$45,000

$8,000
$6,000

$40,000

$4,000

US Household Median Income Adjusted For Inflation

$35,000

$2,000
$0

'68

'71

'74

'77

'80

'83

'86

'89

Source: Bloomberg, Raymond James Ltd.

'92

'95

'98

'01

'04

'07

'10

'13

'50

'55

'60

'65

'70

'75

'80

'85

'90

'95

'00

'05

'10

'15

Weekly Trends

February 26, 2016 | Page 4 of 4

Important Investor Disclosures

Complete disclosures for companies covered by Raymond James can be viewed at: www.raymondjames.ca/researchdisclosures.
This newsletter is prepared by the Private Client Services team (PCS) of Raymond James Ltd. (RJL) for distribution to RJLs retail clients. It is not a
product of the Research Department of RJL.
All opinions and recommendations reflect the judgement of the author at this date and are subject to change. The authors recommendations may
be based on technical analysis and may or may not take into account information contained in fundamental research reports published by RJL or its
affiliates. Information is from sources believed to be reliable but accuracy cannot be guaranteed. It is for informational purposes only. It is not
meant to provide legal or tax advice; as each situation is different, individuals should seek advice based on their circumstances. Nor is it an offer to
sell or the solicitation of an offer to buy any securities. It is intended for distribution only in those jurisdictions where RJL is registered. RJL, its
officers, directors, agents, employees and families may from time to time hold long or short positions in the securities mentioned herein and may
engage in transactions contrary to the conclusions in this newsletter. RJL may perform investment banking or other services for, or solicit
investment banking business from, any company mentioned in this newsletter. Securities offered through Raymond James Ltd., Member-Canadian
Investor Protection Fund. Financial planning and insurance offered through Raymond James Financial Planning Ltd., not a Member-Canadian
Investor Protection Fund.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual funds. Please read the prospectus before
investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The results presented
should not and cannot be viewed as an indicator of future performance. Individual results will vary and transaction costs relating to investing in
these stocks will affect overall performance.
Information regarding High, Medium, and Low risk securities is available from your Financial Advisor.
RJL is a member of Canadian Investor Protection Fund. 2016 Raymond James Ltd.