The Next President Is...

Just one more day…

By tomorrow night, all this election nonsense will finally be behind us. And it can’t come any faster, as far as I’m concerned, because the stock market has been in a serious funk for the last couple of weeks.

As of October 28, the initial results from third-quarter earnings showed that the companies of the S&P 500 were finally going to do what they haven’t been able to do in almost 18 months: grow earnings. 

You’ve probably heard about what’s been called the “earnings recession.” Largely due to really weak earnings from energy companies, the total per-share earnings for the S&P 500 has been falling for five straight quarters. But again, as of late October, earnings were growing at a 1.8% clip. And it’s actually gotten better…

FactSet now tells us that earnings growth is set to rise 2.7% for the third quarter…

So, the blue bars in this chart show us how earnings look now, while the gray bars show what estimates looked like on September 30. As you can see on the far right, energy isn’t helping at all. In fact, energy is still hurting — a lot. But look what sectors are surprising…

Utilities, financials, tech, and… real estate? 

OK, if you don’t know, a new sector was recently added to the S&P 500 — they call it Real Estate, but it’s actually Real Estate Investment Trusts (REITs).

REITs are kind of special. They own real estate, then lease it and pay nice dividends with the proceeds. So long as they pay out +90% of their income as dividends, they pay no corporate income tax. Basically, REITs exist to pay dividends. So if you’re not investing in REITs, you’re missing one of the best investments in the market today. 

REITs (and dividend-paying tech stocks) have long been the central focus of my Wealth Advisory income dividend newsletter. Over the last two years, we’ve pulled gains of 141% and 75%. We’ve been in and out of a third one twice, nailing down ~30% gains each time. But it’s over the long term that you really get the juice — two REITs we recommended in 2008 are up 875% and 911%. That’s the beauty of compounding interest — your gains start to go nuts after you’ve had the stock for a while.

In a few years, the most recent REITs added to the Wealth Advisory portfolio will show similar returns… 

A Record-Breaking Streak

So, anyway, back to the discussion of earnings. As I was saying, S&P 500 earnings are looking better than they have since mid-2015. And yet the election has totally dominated trading. And not in a good way, either…

The Volatility Index (VIX) — which rises as people buy put options — just set a record when it rallied for the ninth straight day. As of Friday, the S&P 500 has fallen below 2,100 as investors got defensive. But here’s the thing: the uncertainty will be gone as of tomorrow night, and the market can finally make a decisive move. 

But which way? 

I’ve told you about my election barometer Gilead Sciences (NASDAQ: GILD). It’s been pretty strong, despite the overall market. I think it’s signaling that we’ve got a rally coming up. And given the strength of earnings, it could be a pretty good rally.

But here’s the thing: if you’re watching the stock market right now (Monday morning), you know that stocks got off to a great start. The dollar is strong, oil is rallying, and gold is getting whacked. And it’s not even Election Day…

After a nine-day losing streak, stocks were “due” to bounce back. I suspect this rally is premature. The fact is, we’re all losing in this election…

We’re All Losing

No matter if it’s Trump or Hillary, there will be a lot of unhappy Americans on Wednesday morning. Voters on each side have been vilified by the other. No matter who you’re voting for, there are a lot of your fellow Americans that think you’re wrong, stupid, and maybe even a traitor. It’s worse than I’ve ever seen it in my 51 years; this doesn’t bode well for the country or for the market. 

Part of the reason for investing is that you see a better future. The economy improves, people make more money, there is opportunity, and so on. But ever since the financial crisis, Americans have struggled to see a better future. That’s why there’s been so little faith in the current bull market. The attitude is: how can stocks price in a better future when everything is broken? 

Back in 2011, the Occupy Wall Street movement blamed Wall Street for the problems America was facing. That movement fell apart, but the anger that spawned it — anger that comes from the feeling that America is broken — is alive and well. And it has moved into politics. Each candidate is increasing that anger in their own way. 

So how do we as Americans come together after this? How do we get past the hate? I don’t know. It won’t be easy. And if the next round of leadership tries to ignore the growing dissatisfaction, then it’s going to get worse. We will get even more polarized and even more angry. 

I don’t know where the breaking point is. I’ve read that racial tensions had been simmering for years in Los Angeles before the Rodney King beating video came out. That video didn’t cause the riots. But it certainly catalyzed the anger that was reaching a boiling point. And it wasn’t until the city’s problems were laid bare that real change could occur. 

I’m not trying to tell you that I think riots or civil war is coming to the U.S. Just that tension seems to be rising. And that’s not good in any way.

I also can’t tell you how that will affect the stock market. It probably just means that skepticism will remain and gurus will continue to get attention by telling everyone that a crash is right around the corner. 

So, about this market. Don’t forget that the Brexit lows from late June are down around 2,000. That’s your worst-case scenario if there’s a surprise sell-off like there was after the last election. That’s about 5% lower — not so bad, all things considered. And if that does happen, I’d expect it to get bought pretty quick.

My best guess is that we see an initial strong move (up or down) that reverses and completely retraces, and then, after that head fake, we get a rally. 

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.