History Shows That Government Shutdowns Don’t Affect Stocks

‘Government shutdown’ is the buzzword of the week. Politicians use it as bargaining chip, the media loves to beat the subject to death and investors worry about what it may or may not do to their portfolio. Surprisingly, history says, ‘Don’t worry about it.’

Is the potential government shutdown a real threat to stocks or is it just a focal point that keeps investors (in particular the media) busy?

History suggests that stocks’ reaction to a shutdown is rather apathetic.

Since 1980, there have been eleven shutdowns with an average duration of 3.9 days.

The most recent one – 12/15/1995 – was the longest shutdown on record. It lasted 21 days. The other ten shutdowns between 1980 – 1995 lasted between one and five days.

The red lines on the S&P 500 (SNP: ^GSPC) chart below show all government shutdowns since 1980.

On average the S&P 500 (NYSEArca: SPY) gained 0.4% the week before the actual shutdown.

Surprisingly the S&P 500 (NYSEArca: VOO) gained 1.3% on average the week after a shutdown.

The day after the shutdown saw an average loss of 0.2%.

One Month after the shutdown the S&P 500 (NYSEArca: IVV) was positive 9 out of 11 times with an average gain of 2.5%.

We should note that all government shutdowns (going back to 1976) occurred in the fourth quarter (five started on September 30).

While October can be scary for stocks, October also has a reputation as bear market killer. The fourth quarter in general is home to various bullish seasonal forces.

Summary

History and seasonality suggest that the impact of a possible government shutdown will be shallow and short-lived.

However, 2013 is a special year. Why? Since the 1970s the S&P 500 has adhered faithfully to a 13 and 7-year cycle. Both cycles meet in 2013 and promise to exert a strong influence on stocks.

A simple chart shows just how powerful those two cycles have been. The 7 and 13-year S&P 500 cycles (along with a telling chart) are discussed in detail here: S&P 500 Cycle Analysis

Simon Maierhofer is the publisher of the Profit Radar Report.

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13-Year Cycle Projects S&P 500 Market Top

A picture speaks more than a thousand words and this S&P 500 chart shows just how powerful the 13-year (and 7-year) S&P 500 cycles have been. Danger lies ahead if those cycles end up being more powerful than QE.

Most markets are subject to boom and bust cycles.

A look at a long-term chart makes it quite obvious that the S&P 500  has strictly adhered to a 13 and 7-year cycle.

We don’t know exactly what’s causing such cycles, but if the S&P 500 SPY finds such cycles important, we shouldn’t ignore them.

13-year S&P 500 Cycle

The chart below shows the S&P 500 (monthly bars) since 1973 on a log scale.

It’s easy to spot at least three major tops and bottoms (dashed gray brackets: December 1974, August/October 1987, March 2000) spaced in 13-year increments.

Based on this 13-year ebb and flow sequence, the next top is projected to be somewhere around the year 2013.

7-year S&P 500 Cycle

What about the Great Recession? The 13-year cycle didn’t see the financial deleveraging debacle, which saw the financial sector (NYSEArca: XLF) decline 80%+, coming.

The post 2007 financial deleveraging debacle falls within the 7-year cycle, which has graced Wall Street with its presence every 5 – 7 years – 1974, 1982, 1987, 1994, 2000, 2007.

In fact, in a December 24, 2007 interview with CNBC’s Maria Bartiromo, I recommended to employ strategies that benefit from a topping market. The 7-year cycle contributed to my back-then bearish outlook.

The 7-year cycle suggests that 2013 and/or 2014 will not enter the history books as just an average garden-variety year on Wall Street.

Cycle Reliability

How trustworthy are those cycles? You are looking at the evidence. It’s all here. Whether you consider the cycles credible or file them away as bogus is up to you.

Cycle analysis is easy. In a nutshell, cycles work … until they don’t.

Regardless of its track record, no investor should base investment decisions solely on cycles (or any other single indicator).

What Cycles Can and Cannot Do

An air traffic controller that spots an unidentified object on his radar will certainly keep a close eye on it until he knows what he’s dealing with.

We don’t have to ‘ground every flight’ or sell all stocks, but the 13 and 7 years cycle should be monitored closely on our radar. A cycle high for the S&P 500 (NYSEArca: IVV) will have a similar effect on the Dow Jones (DJI: ^DJI) and every other major index and shouldn’t be underestimated.

As subscribers to my Profit Radar Report know, I always look at dozens of indicators. To confirm or invalidate the cycles I will be looking at breath indicators and key support levels.

New highs with bearish breadth divergences or a drop below key support would suggest that the cycles need to be taken seriously. As always, my real time observations will be available via the Profit Radar Report.

In the meantime, it helps to know and understand which two secret forces (secret because most of Wall Street isn’t aware of them) continue to propel stocks higher.

If or once those forces dissipate, the bearish cycles are likely to take over. The two forces are discussed in detail here:

QE Haters are Driving Stocks Higher
The Secret QE Bull Market Trade Pattern that Almost Never Fails

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE Newsletter.

QE Haters are Driving Stocks Higher

Stubborn bearish sentiment is one of the key reasons why stocks continue to rally, essentially giving bears the finger. Bears can’t stop the QE liquidity waves. Perhaps it’s time to stop fighting them and learn how to surf them. It would be the best for bears … in two ways.

Bears, if you are looking for someone to blame for having been on the wrong side of the trade – look in the mirror.

Yes, the Federal Reserve’s financial alchemists have artificially engineered this QE bull market and yes, the economy is still lagging.

But that’s not the only reason. The stock market is actually using the bears as a springboard for higher prices.

Stock markets don’t roll over until most of the bears throw in the towel, but bears maintain a tight grip on their bearishness even at their own detriment.

This front-page article featured in the May 5, 2012 edition of USA Today sums the situation up nicely:

“Wall Street’s long-running story about how stocks are the best way to build wealth seems tired, dated and less believable to many individual investors. Playing the market isn’t as sexy as it used to be. Stocks remain out of fashion.”

I remember this time well, because my three key indicators (I call them the three pillars of market forecasting: technical analysis, seasonality and sentiment) were about to line up for a major buy signal.

In a June 3, 2012 update to subscribers I wrote that: “The S&P 500 is within our 1,248 – 1,284 target range for a bottom. Most of my studies suggest higher prices over the coming weeks and a tradable bottom due soon. While June generally falls in the seasonally weak summer period, we find that election year Junes generally sport a strong performance”

The S&P 500 bottomed at 1,266 on June 4, 2012.

Sentiment Sours as Stocks Rally

Since then stocks have rallied and sentiment has soured.

The chart below shows just how stubborn bears are. The S&P 500 ETF (NYSEArca: SPY) soared as much as 36% since its 2012 low, yet the 6-week SMA of bullish investment advisors and newsletter-writing colleagues (polled by Investors Intelligence) is closer to readings seen near bottoms than tops (red circles).

This trend was obvious in early 2013 when the financial media was outright bearish even though the Dow Jones  just pushed to new all-time highs and the VIX (Chicago Options: ^VIX) was lingering near multi-year lows.

Via the March 10, 2013 Profit Radar Report I shared this observation with my subscribers:

“The Dow surpassed its 2007 high and set a new all-time high last week, but investors seem to embrace this rally only begrudgingly and the media is quick to point out the ‘elephant in the room’ – stocks are only up because of the Fed. Below are a few of last week’s headlines:

CNBC: Dow Breaks Record, But Party Unlikely To Last
Washington Post: Dow Hits Record High As Markets Are Undaunted By Tepid Economic Growth, Political Gridlock
The Atlantic: This Is America, Now: The Dow Hits A Record High With Household Income At A Decade Low
CNNMoney: Dow Record? Who Cares? Economy Still Stinks
Reuters: Dow Surges To New Closing High On Economy, Fed’s Help

The market likes to fool as many as possible and it seems that overall further gains would befuddle the greater number. Sentiment allows for further gains.”

Small Correction, Big Effect

The minor summer correction (big black arrow) has suffocated rising optimism before it had a chance to flourish into extremes.

Now, nearly all major US indexes are near all-time highs – the Nasdaq (Nasdaq: QQQ) is outperforming every other broad market index – but sentiment is at best neutral.

From a sentiment analysis point of view, this suggests yet higher stock prices eventually (this doesn’t preclude a deeper correction).

Aside from sentiment, there is an unnoticed but very effective technical pattern that telegraphed the onset of almost every market rally since the 2009 low.

More details about this pattern can be found here:

The Secret QE Bull Market Trade Pattern that Almost Never Fails

Simon Maierhofer is the publisher of the Profit Radar Report.

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Most Deceptive Index in the World Hits ‘All-time High’

When you see an index hit all-time highs you assume that most of its component stocks also trade near their high watermark, but that’s not the case here. The German blue chip index high watermark is inflated by 47%.

Not everything that shines is gold and not every index at new highs is really at new highs.

Germany’s 30-stock blue chip index – the Dax – is trading at all-time highs and is considered the driving force behind Europe’s bounce back.

However, the picture is not as rosy as it looks (in fact it’s much less rosy).

Everyday the Dax is bouncing from one new high to the next, but bellwether stocks like Siemes, SAP and Munich Re are trading well below their all-time high.

Siemens trades 30% below its peak reading, SAP 22% and Munich Re 60%.

How can that be?

The Dax – as quoted by the media – is a total return index, which means that dividends are added to the index. It’s automatically assumed that dividends are reinvested into the index, but dividends don’t increase share prices.

The Dax’s total return approach is unique. The Euro Stoxx 50 (NYSEAra: FEX), Dow Jones, S&P 500, Nasdaq, or Russell 2000 all do not ‘reinvest’ dividends into the index.

What’s the difference?

The chart above illustrates the difference between the Dax Performance Index (including dividends) and the Dax Kurs Index (excluding dividends).

The Dax Performance Index trades 47% higher than the ex-dividend index.

You may think what happens across the pond doesn’t affect you, but US investors own a huge chunk of the Dax. In fact, one single US investment company owns 6% of the Dax and all US investors own much more.

Exactly how much money US investors have parked in ‘made in Germany’ is discussed here: US Investors Own xx% of Germany

Simon Maierhofer is the publisher of the Profit Radar Report.

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US Investors Own 20 Percent of Germany

Germany is considered the economic locomotive of Europe. The Dax – Germany’s blue chip index – is skipping from one high to the next. This benefits US investors, which own 1 of every 5 Dax shares. One company alone owns 6%.

Foreign investors seem to appreciate ‘made in Germany.’

In the year 2000 foreign investors owned 30% of the Dax, which is the German counterpart to the Dow Jones (DJI: ^DJI). Like the Dow (NYSEArca: DIA), the Dax is made up of 30 (German) blue chip stocks.

Today foreign investors own 55% of the Dax.

For example, 3 of 4 Adidas shareholders are not from Germany. The same is true for re-insurer Munich Re. 54% of foreign investors own shares of the Deutsche Bank (translation: German Bank).

Foreign shareholders own the majority stake of 20 out of the 30 Dax components – there is no Dax ETF, but the iShares MSCI Germany ETF (NYSEArca: EWG) provides exposure to the German stock market.

One of the reasons investors around the globe favor German stocks is rising stock prices (although this is deceptive, see below).

The Dax gained 17% in the past year, which translates into $192 billion of new wealth. Ironically, that’s less than the S&P 500.  The S&P 500 ETF (NYSEArca: SPY) trades 21% higher compared to a year ago.

Still, most of the money flowing into the Dax comes from the United States. US investors own 20% of Dax shares.

Blackrock alone owns 6% of Germany’s Dax. Chinese investors own only 3% of the Dax. No doubt, the Dax gains are good news for US investors.

Unfortunately, the Dax is perhaps the most deceptive index in the world, and the ‘real Dax’ is actually only worth half as much as the Dax on steroids. How can that be? The full story can be found here: The Most Deceptive Index in the World Hits ‘All-time High’

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

 

World is Now Richer Than Ever Before

Thanks to the phantom economic recovery, mainly noticed by rising share prices in stock exchanges around the world, aggregate global wealth has risen to a new staggering high … but Draghi finds a fly in the ointment.

Based on Allianz’s Global Wealth Report, global shareholders are richer than ever before.

The Global Wealth Report tracks global funds held in stocks of every country – like the S&P 500 (NYSEArca: SPY), Dow Jones (NYSEArca: DIA), internationally developed markets (NYSEArca: EFA) and emerging markets (NYSEArca: EEM) – cash and cash equivalent bank deposits, stocks and consumer funds at insurance companies.

Assets like real estate (NYSEArca: IYR), cars, and art are not included in the report.

The wealth of investors around the world reached a total of $150 trillion.

You’d think that’s good news, but Mario Draghi – Europe’s central bank president – found a fly in the ointment. It has to do with banks. In fact, Draghi is alarmed.

Here’s the full story: Europe’s ECB Warden is Alarmed … For the Wrong Reason.

Simon Maierhofer is the publisher of the Profit Radar Report.

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Europe’s ECB Warden Draghi is Alarmed … For the Wrong Reason

Like Bernanke, ECB President Draghi is famous for flooding the European financial system with cheap money. The European QE (LTRO) has brought forth some side effects that have Draghi worried, although for the wrong reasons.

This came in from Germany’s Handelsblatt newspaper:

European Central Bank (ECB) President Mario Draghi is concerned about the European banking system and is ready to unleash more emergency loans.

His concern however is over the ‘wrong reason.’ What’s the wrong reason?

Excess liquidity in the European financial system has dropped from 800 billion euro to euro 225 billion.

This sounds like bad news, but it’s not.

Liquidity has dried up because European banks are paying back their 3-year LTRO loans sooner than necessary.

Here’s a brief refresher on LTRO, which stands for Long-term refinancing operations. LTRO is essentially the European counter part to QE.

There were two tranches, LTRO I and LTRO II.

  • Via LTRO I (December 21, 2011) the ECB provided euro 489 billion worth of 1%, 3-year loans to 523 banks.
  • Via LTRO II (February 29, 2012) the ECB provided euro 529.5 billion worth of 1%, 3-year loans to 800 banks.

Good News, Bad News – All Good News

This is a good news/bad news kind of scenario.

The good news is that banks are doing well enough to repay their loans sooner.

The bad news is that shrinking liquidity has resulted in higher interest rates for bank-to-bank lending.

This development threatens to choke the economic recovery in the euro zone.

“We will watch this development very carefully,” says Draghi.

No doubt they will. How dare a natural side effect of an artificial medicine challenge the EU spin doctor.

What it Means for Investors

In theory more euro loans would be bad for the euro (NYSEArca: FXE) and good for the dollar (NYSEArca: UUP). In reality, technical analysis is likely a better indicator if you are trying to figure out what’s next for the euro and dollar.

How will it affect European stocks? If European stocks (NYSEArca: VGK) respond to liquidity like US stocks (NYSEArca: SPY), we can assume that good news is good for European stocks (NYSEArca: FEZ) and that bad news is good for stocks, as long as the ECB keeps the money going.

To assure just that, Draghi confirmed that banks will have access to cheap money for years to come.

Below is a small selection of news featured in German newspapers (translated into English). You’ll find that German news sometimes brings out facets omitted domestically or simply offer a different take.

Simon Maierhofer is the publisher of the Profit Radar Report.

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