Wednesday, November 7, 2012

Obama's First Term and The Markets

Now that the election is over I am choosing to look ahead instead of getting caught up in the drama of the results.  Being that President Obama will be working with the same House of Representatives that he has been working with for the last two years, I thought it would be helpful to look at domestic equity classes and see how they performed during President Obama’s first term.

The returns I will be sharing will not include the year 2009.  The lows reached in March of 2009 were historic, and only seen a handful of times throughout our markets history.  Those types of lows are often referred to as the baby being thrown out with the bathwater.  Every sector and every asset class skyrocketed off of their severely sold off levels.  The following returns range from the beginning of 2010 to the close of business on November 6, 2012.  Here are the average returns:

S&P 500 TR
Intermediate Term Bonds
Multi Sector Bonds
Domestic Large Cap Value
Domestic Mid Cap Value
Domestic Small Cap Value
Domestic Large Cap Growth
Domestic Mid Cap Growth
Domestic Small Cap Growth
Broad-Basket Commodities
Consumer Discretionary
Health Care
Natural Resources
Gold & Precious Metals Equities
SPDR Gold Shares (GLD)
Real Estate Securities
Consumer Staples


Obviously our domestic stock markets and fixed income markets have enjoyed this very low-interest rate environment we have been living in the last four years.  Throw in QE1 thru QE3 and a little Operation Twist and it has been darn right giddy for some investors.  Barring a dramatic turnaround in the economic data I believe it is safe to assume that we could see QE4 or maybe even a QE5.  The consequences of this stimulus can be debated.  One thing that is not debatable is the fact that our Federal government needs to keep rates from rising to ensure their own safety.  They are carrying so much debt on their balance sheet (as a result of buying the debt) that a rise in interest rates could really put the Fed behind the 8 ball.

Some of the sector returns are right in line with what you would expect during this period of time.  For example, the SPDR Gold Shares (GLD) have risen 51.46%, and is probably positioned well going forward with a depressed dollar.  Unfortunately many investors chased gold mutual funds thinking they offered the same benefits as the hard asset.  They do not.  Although I like the earnings potential of many miners over the long-term, the fact is they are equities that trade with earnings risk, and that has shown over the last couple years.

Perhaps most surprising has been the consumer.  We keep hearing how awful things have been for the lower and middle class, but the consumer discretionary stock returns suggest that they have been doing just fine.  Many analysts attribute this success to the higher end retailers, where only the ultra rich can afford to spend their dollars.  Maybe that has contributed but I can find many discount retailers that performed very well during this period of time.  For example, TJX Companies (TJX) has risen almost 137%, and Wal-Mart gained nearly 48%.  Not to mention McDonalds (MCD), which is not known for its fine dining that gained 53%.  Keep in mind this continued strength in consumer spending has occurred while personal debt levels continued to fall.  In other words, the majority of consumers have not been spending more than they have to spend.

Many sectors struggled to keep up with the market and other sectors for varied reasons.  The financial sector has had to deal with many policies that I believe handcuff them from ever returning to once lofty profit levels.  However, it is their own fault for blowing themselves up and taking tax payer money.  Natural resources, energy stocks and broad-basket commodities all struggled during President Obama’s first term, and much of the same is expected if you take today’s action as an indicator.  The Obama administration is expected to continue its funding of alternative energy projects and that is considered bad news for traditional energy giants.  Let’s hope the number of projects they invest in that go bancrupt is much smaller in President Obama’s second term.  Without global growth, then global growth expansion will be slower than forecasted and broad-basket commodity stocks will continue to climb an uphill battle.

My forecast for the next four years is that I have absolutely no idea what the markets will return or what sector will be the next leader.  Of course, I have never been able to forecast anything which is just fine by me because I invest for all occasions and my long-term returns suggest there is no reason for changing such a simple philosophy.

Thank you.


Jon R. Orcutt is the founder of Allocation For Life, Author of The Allocation For Life Investment Newsletter, Author of "Master The Markets With Mutual Funds: A Common Sense Guide To Investing Success" and manager/creator of the AFL Models available to Allocation For Life subscribers at Folio Investing.