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Analyst Blog

Historically, the year of a presidential election has been a turbulent one for the stock market. As per data provided by a Market Watch report, in presidential election years, the S&P 500 has posted an average return of 6.5% versus 7.9% in non-election years.

It was worst in 2008, coming less than two months after the U.S. mortgage crisis hit, which led to the Great Recession. The market plummeted about 41%. The recession bug had also started eating into market returns by that time.

3 Critical Trends to Be Watchful of Before Betting on Stocks

Although the table will turn in U.S. politics, can we hold this impending change as entirely responsible for a choppy market that has prevailed for over a year? Election-related ambiguity apart, there are quite a few long-term factors dragging the equity markets down and can also be treated as direct signals of a muted economy with further trouble ahead.

Accordingly, we suggest investors look beyond the presidential election and be cautious of these extremely perilous market trends that may jeopardize their portfolio returns.

Significantly High Consumer Debt Level

With consumers increasingly using their credit cards and spending aggressively like ever before, credit card debt alone is projected to reach a record $1 trillion by the end of the current year. As per data released by personal finance firm WalletHub, in the second quarter of 2016 itself, Americans added $34.4 billion to their credit card debt, nearly half the total added throughout 2015.

On the other hand, debt holders paid down just $27.5 billion, the smallest amount since 2008. This apart, the Fed’s expectation of raising rate once in the balance of 2016 would again swell up the economy’s indebtedness. According to the Fed, this havoc credit card debt when combined with other consumer debts like auto loans, mortgage loans and other debt are expected to flare up the average Americans’ ‘total household indebtedness’ to the recessionary stage in only a few months from now. Notably, the average indebted household balance already rose to $7,817 in the second quarter, just $611 below the level recognized by WalletHub as ‘unsustainable.'

Rising Treasury Bond Yields

From the Brexit-induced historically low levels reached a few months back, the U.S. 10-Year Treasury Bond Yield has finally started to rebound. It rose from 1.35% on Jul 8 to 1.7% on Sep 19 (a 26 basis-point expansion), primarily on the back of an improving labor market data. The yield curve should steepen further with the Fed Chair recently declaring the possibility of a rate hike before this year ends to help the banking system.

These can well ring a warning bell for the global equity market. Such raises attract trading – by both existing and new investors – toward treasury bonds, leading to a bloodbath in the stock market. Data shows that since 1954, the average monthly performance of the S&P 500 is 1% when the 10-year yield is lower than the year before. The S&P return is only 0.4% when yields are on the rise (Seeking Alpha).

Real Unemployment Still High

As per the latest data by the U.S. Department of Labor, the unemployment rate moved down to an impressive level of 4.9% in June and has stayed there. While this reflects recovery at the face level, the inner story is quite different. As per many economists, taking only one parameter as the sole indicator of employment is nothing but ‘oversimplification’ of the whole scenario. We actually need to look past this official number.

As per the U.S. Bureau of Labor Statistics, since 2010, the full-time employment level (at 35+ hours per week) is steady at around 48%, the lowest ever since 1983. To reach an impressive 52% level, at least 10 million new good jobs are required. Total employment, however, is increasing at a snail's pace. In fact, as per a report in the Guardian, while total employment grew just 3,700 in May 2016 – the weakest since Oct 2013, full-time employment fell 0.11%, marking the fourth successive month of decline. This deteriorating real labor market scenario should also remain our focal point before making any investment decision. 

These three trends apart, there are many other long-term factors that can also be treated as direct signals of further trouble ahead. These indicators include the historical low number of business startups that is beginning to take a toll on the economy and the rapidly dropping numbers of companies trading on U.S. exchanges (Gallup).

Iconic Investors Smell Trouble

In fact, the recent bizarre asset shedding by some of the most influential investors of the era is making us more sanguine about a bumpier track ahead. It has been observed that, when the rest of the nation is excited about signs of a gradual recovery in the economy following months of downturn, billionaire investors like Warren Buffett, Jim Rogers, George Soros and many others are selling their stake in equities incalculably.

Berkshire Hathaway , (BRK.B - Free Report) released a significant part of its holding in Johnson & Johnson (JNJ - Free Report) and Kraft Foods Group, Inc. among others. In the beginning of the second half of 2016, Buffett was seen sitting on a cash pile of more than $72 billion – his biggest stack in the 40 years that he has been in charge of the company. Stocks that Buffett is still holding on are big banks like Wells Fargo & Co. (WFC - Free Report) , U.S. Bancorp (USB - Free Report) or American Express Company (AXP - Free Report) . He also holds a significant share of The Procter & Gamble Company (PG - Free Report) .

Bottom Line

Of course, it is natural for investors to try ironing out immediate concerns. However, the collapse that the stalwarts are apprehending is perhaps based on far more bigger factors than the China slowdown, the Brexit, the oil price related bankruptcy or even the presidential election which most of us are musing on these days.

According to the latest Total Wealth Research report, this kind of cash piling by investment behemoths is extremely unusual and indicative of a Wall Street crash down the line. CIA’s Financial Threat and Asymmetric Warfare Advisor Jim Rickards has shared a similar view on a series of dangerous economic trends pointing to a ‘super critical state’ of the economy.

And as per a report by John Whitefoot, selling off stake is a legible decision, considering that the underemployment rate is still at an unacceptable rate of 14.6%, wages are stagnant, personal debt levels are high, and frustratingly, one out of seven Americans are still on food stamps (the Supplemental Nutrition Assistance Program or SNAP).