While stocks survived September/October and is now entering a typically stronger historical cycle, there could still be bumps in the road, writes Jeff Greenblatt.
No longer in the statistical graveyard for stocks for the year, it must mean the rally will last straight through the end of the year. Seasonally speaking, what could stop it? Everyone realizes it is very difficult to get a meaningful correction from Thanksgiving through Christmas. Time is getting short; it’s already the middle of November and the stock market keeps going.
There is really one event that could stall out this rally. Study the Watergate era and you’ll see how the market viewed the removal of the President. It was straight down in the latter phase of the early 1970s bear market. But not a lot is remembered about what the market was doing during the Clinton impeachment process.
As it turns out, a lot of the news and scandal took on new levels during the Asian Contagion crisis. The second half of the crisis hit in late Summer 1998 when it was feared Russia would default. Wall Street didn’t like it but what people don’t remember is around the same time the Clinton impeachment process accelerated. On July 25, 1998 Ken Starr served President Bill Clinton with a subpoena. The Dow topped on July 20. The scandal was in the news on a regular basis from that point on. On Oct. 5, 1998 the House of Representatives opened the impeachment inquiry. Oddly enough the market was in a bottoming phase by that time. Markets staged a big rally through the end of November. Then it sold off again, bottoming only four days before the House approved two articles of impeachment.
Let’s talk about the significance to the market of all this. First, President Clinton was a very popular President, Nixon was not. Nixon’s scandal was in the midst of a longstanding bear market. Clinton’s was in the midst of a longstanding stock market bubble. Nevertheless, President Clinton’s scandal overlapped a serious financial crisis, the worst of the decade. The impeachment inquiry broke as a bad news event that created an important bottom. As you can see each important phase of the process resulted very close to a stock market low (see chart below). When the House approved impeachment it culminated an approximate 7% drop in roughly three weeks.
So, you can see that even in an historic bull market, the action had an allergic reaction. So how does that speak to the current situation? Its hard to say how this will work out but it promises to be a bumpy ride. There is some talk about the approval of articles for impeachment by Christmas. I don’t know that will happen and I’m not trying to make a prediction. But chances are in this environment the market will not go straight up through the holiday. I am still expecting a shake of the trees that remains elusive. Markets have been tired lately where each day has created relatively small candles. We remain at risk for the start of a pullback by the end of the week.
Elsewhere, we discussed the bond market, it was either down or sideways every day since last week with the exception of Wednesday. The U.S. Dollar Index is tiring even as it approaches its larger Andrews channel. Gold and silver have been weak but are trying to find their lows.
Markets remain strong and the economy is hanging on but there is one problem hanging like the San Francisco fog. The Federal Reserve is still working their Repo actions and the media isn’t saying much about it. Its for that reason that I believe we will have a Santa rally but it won’t be as strong as prior years. The market is likely on borrowed time even as they may even be able to kick the can down the road closer to the election.
If you have profits in the stock market from most of this year or even since the beginning of the Trump rally, draw a line in the sand and put in trailing stops. Don’t give back hard earned profits. This year has mostly been sideways. Realize markets no longer have the wind at their back and are on the less favorable side of the four-year cycle. It is likely to continue rallying but volatility should be higher. If history is any guide, there will be market indigestion during these impeachment proceedings.
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