Killing Wall Street
The Problem With Two-Term Presidencies
“Wall St. in Panic As Stocks Crash” — Brooklyn Daily Eagle, 1987
“The Dot-Com Bubble Bursts” — The New York Times, 2000
“New Phase in Finance Crisis as Investors Run to Safety” — The New York Times, 2008
“RBS Warns: Sell Everything” — The Wall Street Journal, 2016
The four most dangerous words in investing are: ‘This time is different.’ — Sir John Templeton
A boy of about 8 years old raises his hand at a political event for President Obama, where he is attending a school to speak. The boy clears his throat as he attempts to shake the cobwebs of fear to speak out in front of all his friends in the gym, and asks the President in the light, confident voice of an 8-year-old “Mr. President, why did you make the stock market crash? I read it. It’s all your fault. I don’t see my parents anymore because of it, now they’re always working again. Dad says we’re not going to Disney Land this year, because we don’t have the money anymore. Why did you let this happen to us?”. To which the president replies: “This time it’s different…”
What the boy read is ‘Killing Wall Street’, which illustrates that history says: “This time is NOT different.” In the past 50 years, every full two-term presidency, without exception, has resulted in a stock market crisis in the last year and a half of the final term. This happens to be right around the time the presidential nominations for both parties begin their campaigns and paint a picture of political uncertainty and, once again, the world’s most powerful nation on the planet has an uncertain political future. Today, a crisis in the stock market is once again raising its head right in the midst of nominations for both the Republican and Democratic parties in the United States. Investors who would usually look to a predictable future of leadership in the United States are instead left looking through clouds of political chaos and uncertainty.
Killing Wall Street is not a doomsday piece, however the introduction may suggest it is. Killing Wall Street is instead, an explanation of a consistent trend in the financial markets which InsiderSense identified, and a trend that has held true for each of the double term presidencies in the past half century (it actually goes back to the Twenty-second Amendment; 1947). We will help you understand an underlying theme that has helped fan the flames of market depreciation, but perhaps more exciting has been the trend following the election, and how you can best position yourself to profit.
Killing Wall Street is for the little boy who has once again lost his family to the system as they try to rebuild what they have lost. Because knowledge is your best friend in financial crises, and although it may be too late to avoid, it isn’t too late to prepare for what history has shown us to come.
The 2 Term Presidential History of USA
A brief walk through two-term Presidencies in the United States
Since the Twenty-second Amendment to the United States Constitution in 1947 which limited presidential term length to 2 terns, there have been 4 presidents who have served the full 8 year term, with one currently serving the last year of his double term:
Republican — Dwight Eisenhower (1953–1961)
Republican — Ronald Reagan (1981–1989)
Democrat — Bill Clinton (1993–2001)
Republican — George W. Bush (2001–2009)
Democrat — Barack Obama (2009–2016)
*You may wonder why Richard Nixon is not on this list, although he was elected to a double term. Nixon was the only president to resign from office in the entire history of the United States, and he signed his resignation papers because of the Watergate scandal in the early 1970s, which was an abuse of power by the Nixon administration in an attempt to thwart activities by Democrats.
If you split the double terms into 2 parts, the first six and a half years and the last year and a half, you have a basis that compares a period of relative political stability to a period of relative political instability in the United States. Since the ratification of the Twenty-second Amendment, the S&P 500 has returned 129% (13% annual) in the first six and a half years, and lost 14% (10% annual) in the last year and a half of two-term presidencies. In other words, the first six and a half years of a two-term presidency returns 23% per year over the last year and a half of double term presidencies.
January 20, 1981 - January 20,1989
“We don’t have a trillion-dollar debt because we haven’t taxed enough; we have a trillion-dollar debt because we spend too much.” — Ronald Reagan
The presidency that came close to never being, with a failed assassination attempt 69 days into the Reagan presidency. Reagan is perhaps best known as a crusader against big government and regulation for his small government advocation and tailoring of policies to empower business. When Reagan began his presidency in 1981, the United States economy was the worst since the Great Depression of the 1930s. An entire new generation of workers, the “Baby Boom Generation”, was fighting to enter the workforce but was being stonewalled by the walls of crippling interest rates and stagflation (when inflation is high, but economic growth is low).
Reagan promised to restore prosperity by getting “the government off the back of the American people” by cutting taxes, slashing spending, and deregulating the economy. His economic policies were rewarded by a lasting and powerful economic boom, driven by the greatest bull market on Wall Street since the 1920s.
Although his presidency was marked by sowing the seeds for the greatest period of wealth creation in history it was also marked by one of the most notorious days in stock market history: Black Monday, when the Dow Jones Industrial Average lost 22% in a single day (the largest single day drop in history). It marked the beginning of a global stock market decline, and occurred in the final 14 months of his presidency. Below are front pages taken from newspapers describing Black Monday:
January 20, 1993 - January 20, 2001
“When I took office, only high energy physicists had ever heard of what is called the Worldwide Web…. Now even my cat has its own page.” — Bill Clinton
Two quotes for a presidency with two very contrasting themes. What President Clinton is perhaps most widely known for is the scandal in his personal life with Monica Lewinsky, the 22-year-old White House intern, which led to Clinton being the second president in history to be impeached (he was acquitted of all charges in ’99). More importantly, Clinton is remembered for being president while the US had its longest peacetime economic expansion, which with the dot-com revolution.
Although many remember Clinton for his personal activities with Monica Lewinsky and his famous quote: “I did not have sexual relations with that woman.”, his centralist policies helped guide a booming economy, and the stock market, to the stratosphere.
The last 6 months of his presidency were marked by the end of the dot-com bubble, which saw the high flying expansion of easy money to non-revenue generating technology companies come to an abrupt stop. The parade of technology companies to Wall Street to list on the stock exchange ended, and it marked the start of a bear market across the entire technology sector, which spilled over into the rest of the financial markets. Below are the clippings from major new publication centers in the year 2000, when the dot-com bubble popped:
George W. Bush
January 20, 1993 - January 20, 2001
“Every nation in every region now has a decision to make. Either you are with us, or you are with the terrorists.” — George W. Bush
In sharp contrast to his predecessor, Clinton, who was at the helm during the longest peaceful economic expansion in US history, President Bush was faced with an act of war by terrorists who took down the World Trade Centers and close to 3,000 American lives with it in the first year of his presidency. This catastrophic event would shape his presidency into one with the most active conflict since the Vietnam War.
With the United States debt load growing amidst the wars overseas in Afghanistan and Iraq, a new bubble was forming as a phoenix of the dot-com bubble. The housing bubble in the United States was fueling the creation of risky financial assets such as mortgage-backed securities and collateralized debt obligations. The banks, in short, were creating too much money that would push up house prices and drive speculation, all on the back of debt that would eventually become unpayable.
The last year and a half of the Bush Administration were punctuated by a slide into the worst financial crisis since the Great Depression of the 1930s. It was the first time since the Great Depression that the very institutions that Americans trust for the safekeeping of their wealth — the banks — would come to the brink of destruction. It played a significant role in destroying trillions of dollars of consumer wealth, and ushered in a new era of near zero interest rates and money supply growth. Below are front pages of major newspapersduring the Financial Crisis of 2008:
January 20, 1993 — January 20, 2001
I think when you spread the wealth around it’s good for everybody. — Barack Obama
President Obama inherited a country in the throes of the most gruesome assault on investor wealth since 1929, and inaugurated his presidential term with a $787 billion Economic Stimulus Bill less than a month after he was sworn in as President. He ended the US military involvement in Iraq, and has presided over the growing threat by the Islamic State terror organization — ISIS. And in contrast to Reagan’s principles that sowed the seeds for the wealth creation of the “baby boomer generation”, President Obama adopted fiscal policy in line with increasing government size and distribution of wealth.
With energy prices and companies continuing their dominance that can be traced back to the fall of technology companies in the wake of the dot-com bubble, energy companies began to experience the same shock to its foundations that technology companies saw in the early 2000’s. Instead of a bubble fueled on the basis of equity issuance as technology companies were, the energy bubble was being fueled by cheap debt from banks. A debt that was repayable at high energy prices and that, at the same time, fueled production expansion as a brand new source of energy came online — US shale.
The last 6 months of 2015, and the first month of 2016 has seen further destruction of value in the energy sector that has spilled over into the entire stock market. Questions of global growth slowing, and trouble in the Chinese economy dominate the financial landscape. Meanwhile, lenders prepare for the fallout of lower oil prices and the defaults on debt by failing producers. In the heat of the oil bull market of the first decade of the 2000s the economic theme was ‘peak oil’. It would now seem the prevailing theme is ‘peak demand’. Below are a couple of clippings from major news publications on the collapse of the Energy Bubble:
The Silver Lining Playbook
The silver lining to hardship in the final presidency year
History suggests that financial markets in 2016 are in line for the volatility and hardship that has been consistent with the last year and a half of double term presidencies. The flip side is, that upon the election of a new president, with the exception of President Bush Jr., we have seen outstanding performance in equity markets. In the first 6.5 years of all two-term presidencies in the last half century, the return in equity markets has been 13% per year.
There is no question that the new president, whomever it will be, will be seeing many of the same themes in the economy that Reagan saw. The Millennial generation (born 1980–2000) is on track to pass the Baby Boomers as the largest living generation, with each Millennial looking for work that is hard to find amidst a global economic slowdown. This is a generation that faces rock bottom interest rates, instead of sky high interest rates. It is a generation that faces a digital world, rather than the seeds of a digital world. It remains to be seen whether this generation will be empowered to embark on the level of wealth creation that their parents did in the 20 years from 1980–2000.
History suggests market outperformance following the political uncertainty of 2016, the data driven robot that powers insidersense will let you know what the insiders, like Warren Buffett, are buying as they see value amidst the fear and chaos. That way you are in the best position to profit when the market turns around.
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*We exclusively focused on the S&P 500 index, as opposed to indexes such as the Dow Jones Industrial Average, or the NASDAQ Composite, as we believe the S&P 500 is representative of the stock market as a whole, with minimal sector bias. Additionally, we focused on the past 50 years, because the reality is that financial markets have evolved significantly both in terms of participation and regulation, which makes it somewhat of a different animal than the markets over 50 years ago (although Eisenhower’s term was used for overall return calculations).