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The markets performance in January (hinted at by the first five trading days of the month) serves as an early warning signal for the year
CONTACTS: INQUIRIES & CLIENT RELATIONS 800.852.1641 clientrelations@ standardandpoors.com SALES 877.219.1247 msa@standardandpoors.com MEDIA Michael Privitera 212.438.6679 michael_privitera@ standardandpoors.com REPLACEMENT COPIES 800.852.1641 S&P Capital IQ 55 Water Street New York, NY 10041
During presidential election years, however, the average quarterly performances took on a bit of an atypical tone. Even though the third quarters performance for the 500 remained the weakest of all four, rising only 0.1%, it was followed closely by Q1, with only a 0.5% average advance. Whats more, Q2 took the title as the strongest quarter, rising an average 2.6% to Q4s average 1.9%. The quarterly frequency of advance was consistent with all four years of the presidential cycle, however, as Q4 scored the highest (rising 81% of the time in the presidential election year), followed by Q2 (69%), Q1 (56%), and Q3 (50%). Therefore, if 2012 were to be a normal presidential election year, the S&P 500 would need to record below-average results in three of four quarters, as well as the full year. Despite these below-average quarterly and annual performances, there is one thing to look forward to: The S&P 500 has risen in 75% of all presidential election years since 1945. This was better than the 59% recorded by years one and two, but less than the 88% recorded for year three, which saw only one decline (2011) and one totally flat year (1947). Picking a President The S&P 500s price performance during the three calendar months leading up to the presidential election has been a good predictor of whether the president or his party would be re-elected or replaced. An S&P 500 price rise from July 31 through October 31 traditionally has predicted the re-election of the incumbent person or party, while a price decline during this period has pointed to a replacement. Since 1948, this election-prognostication technique did an excellent job, in our view, recording an 89% accuracy rate in predicting the re-election of the party in power (it failed in 1968). Whats more, it recorded an 86% accuracy rate of identifying when the party in power would be replaced (it failed in 1956). Therefore, pay attention to the markets performance in the three months leading up to the presidential election, as it will probably do a better job than the plethora of political pundits prognosticating on the presidency. Annual Sector Standouts Investors frequently wonder which sectors have been the best and worst during election years. Since 1972 (based on a cap-weighting of sector component company price performances from 19721989 and S&P Indices thereafter), the S&P 500 Energy sector posted the strongest results during presidential election years, gaining an average 15.6% (and beating the market 80% of the time), versus the average 5.9% price gain for the S&P 500. The Consumer Staples sector was second best, with an average 10.2% gain and 60% frequency of market outperformance. The Information Technology, Materials, and Telecom Services sectors recorded the weakest performances and frequencies of beating the market. So, there you have it. If 2012 turns out to be a normal presidential election year, the S&P 500 would rise in seven of 12 months, as well as all four quarters, but record substandard quarterly and full-year advances. It would also offer an attractive intra-year entry point that is about 8% below the prior years closing level. In all, the S&P 500 would rise only one-third of 1% during the first 10 months of the year and then jump nearly 1.0% in the remaining two months. Whats more, the S&P 500 Consumer Staples, Energy, and Industrials sectors would post the highest full-year returns, while the Information Technology, Materials, and Utilities groups would record the weakest results. If theres one thing presidential election years are good at, however, its predictability. The January Barometer was correct eight of eight times in forecasting positive calendar-year performances, while the frequency with which the S&P 500 has risen during the presidential election year has been comforting at 75%. In addition, the market has been successful more than 85% of the time in predicting whether the party in power will remain in power or be replaced. Therefore, whatever the S&P 500 doesnt provide in absolute return this year, it will likely make up for in predictability.
Year 1 (1.0) 2.6 0.9 3.4 6.3 47 53 59 76 59 Year 2 1.2 (2.5) (0.3) 7.0 5.3 47 50 56 81 59 Year 3 7.0 5.0 1.0 2.9 16.1 88 76 59 71 88 Year 4 0.5 2.6 0.1 1.9 5.7 56 69 50 81 75 ALL YEARS 1.9 1.9 0.4 3.8 8.4 60 61 57 78 70 *Without dividends reinvested. Note: Past performance is no guarantee of future results. Source: S&P Capital IQ.
the S&P 500 rose in price during all four quarters of the year varied greatly from 57% in the third quarter to 78% in the fourth.
INDUSTRY SURVEYS
INDUSTRY SURVEYS
the US recovery. A mild recession in the Eurozone would not tip the US into recession, but the potential financial contagion from sovereign-debt defaults could do the trick. The better domestic data bought the Fed some time. But with looming dangers still dogging the economy, the Fed will stand ready to act. The problem is that monetary policy options are few. Options on how to resolve the Eurozone crisis remain limited. Together with worries that the compromise in Congress will vanish as the election campaign heats up later this year and, with it, prudent decisions on fiscal policy, we may be riding the same rollercoaster all over again in 2013. A Never-Ending Story At least the recent data have given us a more solid footing as we head into 2012. The December payrolls report from the Bureau of Labor Statistics (BLS) provided more hope that businesses are still hiring, with stronger-than-expected numbers across the board. We saw a pickup in nonfarm payrolls, another drop in the unemployment rate, an increase in the hours worked, and a modest increase in hourly earnings. It certainly gave markets another dose of solid economic data to support the notion that the US economy had built up momentum towards the end of 2011. The unemployment rate fell another 0.2% to 8.5% in December, declining for the fourth consecutive month to its lowest rate since February 2009. In contrast to the November drop, the composition was favorable this
Employment
1 0.5 9.5 8.5 7.5 6.5 5.5 4.5 3.5 1 40 1 38 1 36 1 34 1 32 1 30 1 28 1 26
2004 2005 2006 2007 2008 2009 2010 2011 Payroll employment (In millions, right scale) Unemployment (%, left scale) Retail Activity
340 31 5 290 265 240 21 5 24 20 1 6 1 2 8 4
Light vehicle sales (In mil. units, SAAR, right scale) Retail sales (In bil. $, excluding autos, scale at left)
2004 2005 2006 2007 2008 2009 2010 2011 10-Year T-Notes Consumer Confidence
1 20 10 1 1 00 90 80 70 60 50 40 30 20
(1 985=1 00)
3-Month T-Bills
2004 2005 2006 2007 2008 2009 2010 2011 Capital Spending
1 05 1 00 95 90 85 80 75 58 53 48 43 38 33 28
Business equipment production (2007=100, left scale) New orders nondefense capital goods (Bil. of '96$, right scale)
Industrial Production
1 05 1 00 95 90 85 80
(2007=1 00)
INDUSTRY SURVEYS
HOUSEHOLD DEBT IS DROPPING FROM RECORD HIGHS (As percent of after-tax income)
1 50 1 40 1 30 1 20 10 1 1 00 90 80 70 1 990 95 00 05 1 0 201 5 8
7 6 5 4 3 2 1 0
time. The household measure of employment rose by 176,000, and the labor force participation rate was steady at 64.0%, rather than falling as it did in November when many people left the labor force. The U-6 rate, a broader measure of labor underutilization, fell 0.4% to 15.2%, the lowest rate since February 2009. While we expect the unemployment rate to tick up since the discouraged unemployed now are once again looking for work, recent readings have offered signs that the market is stabilizing. This may explain why this holiday spending season was merry: people were willing to spend more on presents. Chain store sales were up 3.5%, the strongest showing since October. Holiday sales may be up around
Source: Federal Reserve Board;US Bureau of Economic Analysis; S&P Economics projections.
2004 2005 2006 2007 2008 2009 2010 2011 Producer Price Index Consumer Price Index ISM Manufacturing Purchasing Managers' Index
65 60 55 50 45 40 35 30
2004 2005 2006 2007 2008 2009 2010 2011 Housing Market (In thousands of units, SAAR)
2400 1 900 1 400 900 400
2004 2005 2006 2007 2008 2009 2010 2011 Consumer Finance
20 1 5 1 0 5 0 -5 -1 0 -1 5 -20
2004 2005 2006 2007 2008 2009 2010 2011 Housing starts Housing permits
2004 2005 2006 2007 2008 2009 2010 2011 Consumer installment credit, net change, in bil. $ Savings rate as a % of disposable income
INDUSTRY SURVEYS
5%, as people dipped into savings to satisfy pent-up demand, after making do with their old appliances for the last three years. However, the hangover will likely set in once the eggnog wears off and people receive the bills from their holiday spending binge. In addition, such negative factors as a still-weak jobs market, high household debt burdens, falling house prices, negative real wage growth, and possible government mistakes this election year will discourage spending. An important determinant for future consumption is real disposable income, which came in flat month-over-month in November. In contrast, spending was up just 0.1% in November and up 0.2% in real terms, so people dipped into savings, pushing the rate down to 3.5% from 3.6% in October. Given that households are still in a state of balance-sheet repair, with income growth subdued and savings depleted, the recent spending spree is barely sustainable. We expect consumers to be cautious in 2012 and reluctant to absorb higher pricesslowing growth, but also keeping inflation pressure limited. Taking a Breather Manufacturing, the recoverys shining star, got a little dimmer in December. After nine solid readings through third-quarter 2011, equipment spending likely slowed to a low single-digit pace in the fourth quarter. November durable orders rose a better-than-expected 3.7% over October. However, core capital goods orders (excluding defense and aircraft), a leading indicator for business investment, actually fell 1.2% in November after falling 0.9% in October. In addition, core shipments have fallen for three consecutive months. These numbers show that despite the 100% expensing credit for businesses that got equipment in place by year-end, the last-minute surge did not take place, which is worrisome. However, businesses are still flush with cash, and likely have replacement needs that were not met during the recession, which will help support spending in 2012, though no longer at the double-digit pace we saw earlier in the recovery. Manufacturers sentiment still indicates that the sector is expanding, or at least that they expect it will do so in 2012. Clear and Present Dangers Recent data gives us hope that the US recovery has built enough momentum to withstand a few bumps in the road. Nonetheless, there are a number of potential severe threats to the expansion in 2012. The effect of a Eurozone financial collapse spreading to our shores is at the top of the list of events that could push the US into recession. But thats not all. The recent dtente in Congress could easily deteriorate into a stalemate at a time the US can least afford it. As countries with slowing domestic economies fight for export-led growth, the risk of currency manipulation or trade wars increases. Heightened turmoil in the Middle East could cause oil prices to spike, wrecking the resiliency of our recovery. This list of risks is not exhaustive, but represents a few of the issues we worry about as we enter the New Year. The Eurozone crisis is the biggest uncertainty facing the US recovery right now. There are many paths this ongoing crisis could take, with different degrees of pain. The worst-case scenario would be a financial meltdown and severe recession in the Eurozone, coupled with deflationary pressures that spread abroad. Of course, European policymakers may instead come to their senses, and commit to using all the fiscal and political weapons at their disposal to solve the crisis. For now though, indecision seems to be their preferred mode, as it has been for the past two years. In December, the US Congress managed (reluctantly) to compromise on extending stimulus for several items. However, the political war is not over. We had expected Congress to eventually make the token concessions needed to extend the payroll tax cut and emergency unemployment benefits for a full year, but we only got a few months. And even if they do continue extending the benefits in a piecemeal fashion, a temporary payroll tax cut will provide weaker stimulus than a commitment to benefits through the year, because much less is spent. Moreover, there is still a risk that policymakers action, or inaction, might tighten fiscal policy and thus threaten another recession. This does not address the policy conflagration that sets in at the end of 2012, which will likely keep worries high through most of this year unless Congress surprises us. If nothing is done, automatic spending cuts will kick in at the start of 2013 due to the Super Committees failure to reach a compromise on trimming the governments long-term debt. In addition, the Bush tax cuts will expire at the end of this year. Even if the payroll tax cut and emergency insurance benefits are extended through the year, as we expect, they will also expire at the beginning of 2013. We have assumed that the government will come to its senses and reach a compromise on tackling the long-term debt, whereas tax increases and spending cuts (including a swipe at
6 TRENDS & PROJECTIONS / JANUARY 2012 INDUSTRY SURVEYS
entitlements) will be phased in gradually over several years. But even in normal times, thats a risky bet. With this being an election year, the threat of a more extreme outcome is even higher. World growth is heading for a slowdown in 2012. Our European economist, Jean Michel Six, already sees a mild recession for the Eurozone in early 2012, which could get worse. While China so far remains healthy, recent data indicate that the worlds second-largest economy has also slowed a bit. In countries where domestic demand softens, governments could decide to relieve upward pressure on their currencies to gain an advantage in trade and boost exports. One trigger for this would be if a central bank in one country decides to inflate its domestic economy out of the debt crisis, which could result in other countries depreciating their currencies in retaliation. Taken one step further, policymakers may move to more extreme protectionist policies. While the world is very aware of the net loss of such actions, once they start, theyre hard to stop, increasing costs and cutting growth for everyone. While unlikely, in a recessionary or slow economic environment, the risks of such policy mistakes increase. Keeping Hope Alive To end on an upbeat note: there could also be a few pleasant surprises, which could finally launch this recovery into V-shaped domain. While we believe the risks are weighted to the downside, a few items could turn things around. In Europe, fiscal policymakers could move more quickly on fiscal integration with a credible plan for centralizing budgetary decisions. While the European Central Bank (ECB) gave no indication at its press conference after its policy meeting on January 12, the ECB may even launch quantitative easing in the form of buying sovereign bonds. In the US, as we already saw in the second half of last year, private sector momentum could continue to drive the economic recovery higher, despite government uncertainties. US policymakers may put their reelection goals aside and reduce policy uncertainty by taking concrete action such as allowing the payroll tax cut and jobless benefits to be extended through the year. The more cordial political environment would be conducive to working through key long-term spending issues as well, including their differences with the Bush tax cuts and entitlements. Finally, Federal Reserve chairman Ben Bernanke warned Congress that if it does nothing, massive housing imbalances will continue to wreak havoc on the economic recovery. In response, the Fed will develop a government-facilitated own-to-rent program to dispose of government real estate properties.
INDUSTRY SURVEYS
8
----- Annual % Change ----2010 4.2 2.0 7.2 2.9 0.9 4.4 14.6 (4.6) 0.7 4.5 (1.8) 11.3 12.5 3.7 3.6 25.0 19.0 51.2 5.6 11.1 4.2 10.5 16.8 6.0 Prices & Interest Rates Consumer price index Treasury bills 10-yr notes 30-yr bonds New issue ratecorporate bonds Other Key Indicators Housing starts (1,000 units SAAR) Auto & truck sales (1,000,000 units) Unemployment rate (%) U.S. dollar 4.1 0.0 3.2 4.3 5.0 572.3 12.1 9.1 (12.2) 4.7 3.4 5.4 6.3 15.7 3.4 2.8 4.1 2.8 11.0 **Income & Profits Personal income Disposable personal income Savings rate (%) Corporate profits before taxes Corporate profits after taxes Earnings per share (S&P 500) $12,955.3 11,559.2 4.8 1,890.6 1,470.1 83.87 $12,979.6 11,571.1 3.9 1,912.9 1,501.5 86.98 3.1 0.0 2.4 3.7 4.5 615.3 12.4 9.1 1.0 $13,056.3 11,613.9 3.5 1,989.5 1,562.1 89.46 1.0 0.0 2.0 3.0 3.9 669.1 13.5 8.8 15.7 $13,212.9 11,748.1 3.9 2,051.5 1,576.6 93.54 0.9 0.0 2.1 3.1 4.0 698.6 13.3 8.7 11.1 $13,339.2 11,851.0 4.0 1,965.4 1,512.8 95.67 0.4 0.0 2.3 3.2 4.2 701.6 13.3 8.8 1.8 2.2 8.3 1.7 1.4 8.7 10.0 (1.9) (2.1) (1.8) (2.2) 6.9 4.8 2.3 6.3 1.9 1.7 5.4 6.8 6.9 (2.4) (2.5) (2.4) 4.0 3.2 *Components of Real GDP Personal consumption expenditures % change Durable goods Nondurable goods Services Nonresidental fixed investment % change Producers durable equipment Residental fixed investment % change Net change in business inventories Gov't purchases of goods & services Federal State & local Net exports Exports Imports $9,392.7 0.7 1,260.2 2,076.6 6,067.0 1,413.2 10.3 1,103.5 314.8 4.2 39.1 2,508.2 1,058.3 1,456.1 (416.4) 1,765.0 2,181.4 $9,433.5 1.7 1,277.8 2,073.7 6,096.1 1,465.6 15.7 1,145.7 315.7 1.2 (2.0) 2,507.6 1,063.7 1,450.4 (402.8) 1,785.2 2,187.9 $9,495.1 2.6 1,330.8 2,081.6 6,107.2 1,477.8 3.4 1,149.0 319.7 5.2 31.5 2,486.3 1,051.1 1,441.4 (387.1) 1,810.2 2,197.3 $9,550.4 2.3 1,338.9 2,099.6 6,136.5 1,492.2 3.9 1,164.9 328.8 11.9 54.7 2,468.9 1,043.8 1,431.3 (396.9) 1,820.9 2,217.8 $9,605.5 2.3 1,350.1 2,113.2 6,167.7 1,508.2 4.4 1,189.1 333.5 5.8 59.0 2,450.7 1,035.0 1,421.8 (416.1) 1,832.5 2,248.5 $9,664.9 2.5 1,377.1 2,122.6 6,195.5 1,515.1 1.8 1,206.3 340.1 8.2 50.3 2,433.5 1,025.3 1,414.1 (414.9) 1,852.9 2,267.8 $13,461.3 11,925.8 3.6 1,981.7 1,528.6 98.15 2.3 0.0 2.4 3.3 4.3 719.0 13.6 8.8 (4.0) 3.9 3.2 Gross Domestic Product GDP (current dollars) Annual rate of increase (%) Annual rate of increasereal GDP (%) Annual rate of increaseGDP deflator (%) $15,012.8 4.0 1.3 2.5 $15,176.1 4.4 1.8 2.6 $15,314.2 3.7 3.3 0.5 $15,456.0 3.8 2.2 1.5 $15,519.1 1.6 1.2 0.5 $15,619.1 2.6 1.3 1.2 $15,731.5 2.9 2.0 0.9 $9,725.8 2.5 1,402.1 2,131.1 6,227.3 1,530.8 4.2 1,231.2 346.5 7.7 41.7 2,419.3 1,015.6 1,409.3 (403.8) 1,885.1 2,289.0 $13,588.7 12,005.6 3.3 1,986.5 1,537.3 99.34 1.4 0.0 2.5 3.4 4.3 729.1 14.0 8.8 (4.5) E2011 E2012 Q2 RQ3 EQ4 Q1 Q2 Q3 Q4 ----------------- 2011 ----------------------------------------- E2012 ------------------------E2013 Q1 $15,871.0 3.6 2.3 1.3 $9,764.9 1.6 1,416.5 2,139.3 6,246.1 1,547.1 4.3 1,244.0 357.6 13.4 37.9 2,407.4 1,006.3 1,406.5 (374.2) 1,927.7 2,301.9 $13,685.2 12,053.1 2.9 2,164.8 1,640.9 100.38 1.8 0.0 2.6 3.5 4.4 800.1 14.3 8.8 (3.6)
Economic Indicators
2010
E2011
E2012
$9,220.9 2.0 1,188.3 2,041.3 5,991.8 1,319.2 4.4 1,019.4 321.5 (4.6) 58.8 2,556.8 1,075.9 1,487.0 (421.8) 1,663.2 2,085.0
$9,424.5 2.2 1,286.5 2,076.8 6,077.4 1,433.9 8.7 1,121.3 315.4 (1.9) 29.4 2,504.0 1,056.6 1,453.6 (407.7) 1,777.5 2,185.1
$9,636.6 2.3 1,367.1 2,116.6 6,181.8 1,511.6 5.4 1,197.9 337.2 6.9 51.4 2,443.1 1,030.0 1,419.1 (407.9) 1,847.9 2,255.8
INDUSTRY SURVEYS
Note: Annual changes are from prior year and quarterly changes are from prior quarter. Figures may not add to totals because of rounding. AAdvance data. PPreliminary. EEstimated. RRevised. *2005 Chain-weighted dollars. **Current dollars. Trailing 4 quarters. Average for period. Quarterly % changes at quarterly rates. This forecast prepared by Standard & Poor's.