Deutsche Bank’s David Bianco thinks the next move for the S&P 500 is a 5% to 9% decline.
And this could be really good news for Donald Trump.
In a note to clients out Saturday, Bianco said a 5% to 9% decline in the benchmark stock index is likely ahead of the election, “given risks to healthy EPS growth and PEs becoming too dependent on low yields.”
Bianco adds that, “Investors seem too excited about improving growth, still slow, and yet also complacent about long-term yields. We think the bull continues, but patience will be rewarded.”
This expected decline could have big political consequences: History says a drop in the stock market ahead of a presidential election favours the entry of a new party into the White House.
And in 2016, this means Donald Trump would defeat Hillary Clinton.
Back in May we highlighted research from Strategas Research Partners which showed that in 19 of the last 22 US elections, the S&P 500’s performance for the three months leading into the election has “predicted” the outcome.
The “prediction” — which isn’t so much a forecast as a record of tight coincident indicators — says that when stocks are higher in the three months before an election, the incumbent party wins. When stocks are lower during this period, we see a changing of the guard.
The simplest view here would be that if the stock market is a reflection of how investors view future prospects for the US economy: Stocks going up means people think things will get better; stocks going down would mean people think things get worse. And in anticipation of things getting worse, voters might look for new leadership.
Bianco also notes that seasonal market patterns — particularly the backdrop of a big rally we’ve seen since the Brexit vote — don’t augur well for additional gains from here.
“Historically, S&P gains May-Sept are seasonally weak,” Bianco writes.
“Out of recessions, average S&P May-Sep gain is 0.8% and -0.9% in election years vs. the 5.3% gain since April end this year. The S&P already had a correction in Jan-Feb and a 5.6% dip in June, but we believe S&P will have another 5%+ pullback before the Nov election and then rally into year-end to our 2150 target.”
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