At the ninth edition of Indian MF industry's biggest event Cafemutual Confluence 2020, Ken Fisher, Executive Chairman and Co-CIO at Fisher Investments said that the correlation between the US market and other worldwide equity markets is almost hundred percent. The US market is the biggest single market in the world and the rest of the world correlates very highly with the US market.
Here are some key observations from his presentation at Cafemutual Confluence 2020 Investment Marathon:
How did the market react to correction due to covid-19?
- After the mega correction, quality growth stocks are pulling the market upwards. It is even reflected on gains in large technology companies stocks
- MSCI World Index that measures equity market performance in global emerging markets has performed a little worse than US stock markets
- Meanwhile, currently Nasdaq composite, which represents most technology and internet-related companies, is at its all-time high
- Besides, the current bear market is different from conventional bear markets as small cap stocks and value stocks are struggling instead of leading the market like every time
- Further, through the course of the very short but big downturn, market breath has continued to narrow as fewer and fewer stocks have led the market higher
How politics impacts markets?
- Markets react differently to different parties running the country. It is different when a Republican wins in the election versus when the Democrat wins the election
- In case of S&P 500 total return index, when Democrats win, returns have been slightly negative whereas when Republicans win they've been positive
- On the other hand, in the inaugural year, those two flip flop. Democrats have big inaugural years; the only one Democrat since World War II has not had a double-digit positive return and that was Jimmy Carter in 1979. It was only down 7.9%, not a big negative
- Meanwhile, just as Democrats do not have big election years in a positive sense, neither do Republicans in inaugural years. The difference in returns is not very big but it is a matter of timing
- Further, if this year is to be a better year, it's probably true that President Trump wins, if next year 2021 is to be a better year it is probably true that former Vice President Biden wins
- This is not about partisan politics or who you like or who you dislike. And the reason this works is because the Republican party is typically thought of more pro-business, more anti-regulatory, more pro-market, more free market
- The democrats typically thought of as more regulatory, expansion of government, more anti-business. Therefore, those fears when the Democrat gets elected tend to hold the market down in election year. The American system despite everyone's bias is to believe everything about politics and not believe anything that contradicts it.
- The fact is that newly elected presidents, whether Republican or Democrat, don't get to do nearly as much as what they promised and talked about when they were running for office
- So, to the extent that Democrats frighten the market a little or Republicans made them hopeful in the election year. Hence, when Republicans win elections there's disappointment and when Democrats win there's ‘Oh, it wasn't so bad’
- In the first half of the presidential years markets are always wiggling while in the end years it goes up nicely. Hence you should expect acceleration in returns in the US markets in the last couple of years of presidency. The reason this works for America and bleeds over to the rest of the world is simply because early in the election year there's so much uncertainty.
- What's important to markets is it loves falling uncertainty and hates rising uncertainty. And in the early portion of a presidential election year all the aspiring candidates make a lot of extreme promises and in making the extreme promises they end up creating uncertainty
- This year has started with sheer panic and an economy that would deteriorate and destroy earnings domestically in every country. And this bull market, which has begun in an almost perfect V shape, almost perfect V shape to the downturn of the bear market will accelerate gradually
