Same Old Song & Dance
By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group
Sometimes things seem different, and yet they are still the same. Regardless of who was going to emerge victorious on election day, the same issues would face either candidate post-election - stretched valuations, 
earnings revisions lower, and consumers feeling tired. The 1974 song "Same Old Song And Dance" is the inspiration for this week's musings. Here's some trivia about the song:
- This song was written in 1973, and unlike most of Steven Tyler's songs, the lyrics on this song are a bit nonsensical. It was the lead single on Aerosmith's 2nd album, "Get Your Wings."
- While the song wasn't particularly a hit, it helped launch the album, which remained on the Billboard charts for over a year and was certified 3x Platinum.
- Aerosmith's first album sold poorly, suffering from lousy promotion by Columbia Records, and the label nearly dropped the band. The band's managers, Steve Leber and David Krebs, had a big stake in the album, as they were also facing a financial shortfall.
- In 1997, Perry explained to Aerosmith biographer Stephen Davis: "The tracks were the stuff we'd been working on at our apartment on Beacon Street in the summer of '73. I wrote the riff to "Same Old Song and Dance" one night in the front room and Steven just started to sing along."
"Fate comes a-knockin', doors start lockin'
Your old time connection, change your direction
Ain't gonna change it, can't rearrange it
Can't stand the pain when it's all the same to you, my friend
When you're low down and dirty, from walkin' the street
With your old hurdy-gurdy, no one to meet
Say love ain't the same, on the south side of town
You could look, but you ain't gonna find it around
It's the same old story, same old song and dance, my friend
It's the same old story, same old story
Same old song and dance, yeah"
Here's what we've seen so far this week..
Fate Comes A-Knockin'. There are multiple happenings this week that need to be covered, making this week's musings a little lengthy. We'll start with the Fed. 
On Thursday of this week (you didn't read that incorrectly - the rate decision was on Thursday instead of Wednesday), the Fed unanimously voted to lower rates by another 25 basis points, on top of the 50 basis point rate cut back in September. The Fed stated that another rate cut of 25 basis points is likely in December. 
Powell stated at his afternoon press conference that higher Treasury yields are due to "stronger growth expectations & less recession risk, minimizing the impact of higher inflation expectations." Huh? Wouldn't stronger growth lead to more consumption, leading to higher inflation? At the same time, the Fed's official statement included the phrase, "the economic outlook is uncertain." So, there's stronger growth expectation at the same time as economic uncertainty? The reason he state that is because 3rd quarter GDP came in last week lower than expected (+2.8% vs +3.0%) and the Fed's own GDPNow estimate for the 4th quarter is lower than that at +2.5%. A large part of a potential slowdown in growth would be due to the consumer - more about that later.
Your Old Time Connection. The next major development this week was the outcome of the election. While former President Trump emerged from Tuesday's election as the winner, we maintain our view that no matter who won, 
the President-elect would inherit the same issues that have been of concern the last few months. It's important to remember some factual information and not to get two emotional - either way - about the election results. First, whoever is in charge in D.C., the U.S. economy and the market tend to have an upward bias. There are opportunities and money to be made in the market regardless of who is sitting in the White House or who controls Congress. Second, presidents do not control markets. We still operate in a "free market" system and the upward bias in the market has benefitted both political parties. While certain sectors might under-perform under one party and out-perform under another party, the market still tends to head higher over time. 
Whether one party inherits a bear market or not, is a matter of timing and not necessarily due to a specific policy. Third, historically speaking, we tend to see better returns initially from a GOP winner after a DEM incumbent, but that tends to fade after approximately nine months. It's possible that is what we may be seeing from the most recent response by the market to Tuesday's results. 
We saw the S&P 500 Index rally 2.5% on Wednesday, but markets seem to have settled down a bit since then. The last important thing to keep in mind is what kind of market/economy is Trump inheriting? It's not so much a function of specific policies, but of good/bad timing. 
For example, in 2016 when Trump won the election, the economy was in solid shape, but was not robust. The market return for the S&P 500 was in low double-digits, inflation was low and interest rates were much lower. Unemployment was on the decline and the housing market was in better shape. Contrast that to today and we see stretched equity valuations, a once-in-a-lifetime equity market, higher interest rates and inflation, a struggling housing market, and an economy/market that might be peaking rather than positioned to rally substantially. This isn't an endorsement of one candidate and a condemnation of another - it's simply a matter of what does the data tell us and what might it mean going forward?
Same Old Song And Dance. The issues that we have highlighted over the last several weeks are some of the same issues that we have seen prior to other recessions. 
The state of the consumer is not what it was when Trump first took office. In fact, the consumer more closely resembles 2000 and 2007. With higher interest rates, consumers appear to be scaling back on adding further debt to their personal balance sheets. In fact, over the past 12 months, we've actually seen three negative months for consumer credit. 
The trend appears to be headed lower, making this holiday shopping season one of the more important ones in terms of learning how healthy is the consumer. Consumers drive earnings which drive stock returns. 
It would appear that earnings are being revised lower on a consistent basis for the next few quarters. Estimates for 4th quarter corporate earnings continue to slide, with the earnings for the top S&P 500 companies (Mag 7) have been revised lower by 13%. At the same time that analysts are lowering earnings expectations, individual investors are adding more equities to their portfolios. 
Last week, flows into Large Cap equity funds were the 2nd highest ($8.7 bil) in the past 3 months. The move higher in equities that started at the end of the 3rd quarter in 2023 coincides with the increase in margin debt among investment accounts. Investors are adding more risk to their portfolios while equities are making all-time-highs. The so-called "smart money" is doing the opposite. The amount of cash in Warren Buffett's Berkshire Hathaway portfolio has hit an all-time-high. Typically, when that has happened, markets have made peaks within 6 to 12 months thereafter. While investors are buying equities, Buffett is reducing equity exposure. In fact, the "Buffett Indicator," a measure of the stock market's valuation against economic output, is indicating that equities are nearing a peak. What investors ought to be thinking about is how to diversify their portfolio and reduce concentration risk at valuation levels that are historic.
Markets, Economies, & Politics...it's the Same Old Song & Dance.
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Disclosures
The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.
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