What Would a Hillary Clinton Indictment do to the Market?
Bill Gunderson | July 05, 2016


I have now been a professional money manager for the last two decades. One thing that I know for sure is that markets do not like uncertainty.

If you think that Brexit was bad, what would happen if this year’s U.S. presidential election was thrown into turmoil?

We got a small glimpse of what could happen a week ago last Friday.

see also: Voters: Trump Has a Good Chance of Reelection in 2020

It all started two Thursdays ago with a 230 point, pre-Brexit gain in the Dow. The market obviously thought that the “stay” vote would win.

The market had it wrong, the “stay” vote lost. The Dow plunged 610 points on Friday. This was followed by another 260 point drop on Monday.

In the days leading up to the Brexit vote, I reminded investors in a June 20 article that S&P 500 earnings were way more important than Brexit.

The market is now up 807 points since then, and now we are almost back to where we started! But, look at the chaos and confusion that Brexit caused.

I do not believe that the fallout from Brexit is behind us. The jury is still out on this one.I have hedged many of the portfolios that I manage with an inverse ETF on Europe just in case.

U.S. markets seem to now be looking ahead to a smooth and orderly presidential election in November. Like Brexit, do the markets have this one wrong too?

An indictment of the presumptive democratic candidate would make Brexit look like child’s play. After all, S&P 500 companies have a less than 4% exposure to S&P 500 earnings.

The president of the United States obviously has a much bigger impact on the U.S. economy and S&P 500 earnings than the U.K. does. I am not saying chaos is about to happen, but it is a possibility that we now need to start thinking about.

Earnings for the S&P 500 have been growing every year since the market bottomed back in March of 2009. That is the month that my weekly newsletter went bullish. In it, I stated that a new bull market has been born.

That buy signal on the market has remained in place since then as I currently maintain a 2,300 target price on $135 per share in S&P 500 earnings for 2017.

I am a market-timer, however. There will be another recession. There will be another bear market. The next one could be really, really ugly.

The last one with its 50% loss from peak to trough was bad enough, but it did not have the anywhere near the monetary stimulus that this one has had pumped into it.

On my daily national radio show, I constantly remind listeners that stocks and indexes follow earnings. As long as S&P earnings continue to grow, the market will continue to go higher. But as a market timer, I also warn that this bull market will eventually come to an end when earnings begin to recede. 

This is what happened back in 2007-2009, the S&P 500 tumbled along with S&P 500 earnings. There was plenty of warning however, as it began with a fall in earnings expectations.

It is time to at least think about the ramifications of chaotic presidential election season. I still remember what Bush V. Gore did to the markets.

In the meantime, I see several sector bubbles forming.

Bubbles are not good. As they grow, there is a dangerous mindset that develops. The mind tends to convince an investor that there is no end to the increase in tulip bulb prices; there is no end to the increase in prices of dot.com IPO’s; and there is no end to the increase in prices of single-family homes.

Yet, we know from sad experience that there is an end out there somewhere. Tulip bulb prices eventually crashed, and speculators were wiped out. Most of the dot.com IPO’s did not have a business plan post IPO, and the walls of the Nasdaq came tumbling down. It has now taken fifteen years to get back to where we were during the dot.com bubble.

Lastly, the easy money that was fueling the demand for single-family homes finally turned into toxic debt. Housing prices crashed, many homeowners were left upside-down, the financial sector got hammered, and the S&P 500 plunged along with S&P 500 earnings.

Assets do not go up forever, there are many of them trading today with that same kind of mindset building. Before we get to the new potential megatrend forming, I first want to warn you about these bubbles that are forming. I am not saying to dump them immediately, but the time may be getting ripe for some profit-taking.

The bubbles that I want to mention all have one thing in common.


Real Estate Investment Trusts (REIT’s) are now trading at fast-growing multiples. I see it in almost every individual REIT stock that I look at. It is obvious that income seekers are chasing REIT’s for their better-than-treasury yields.

If we look at the Vanguard REIT ETF (VNQ), we can see that it is currently trading at all-time highs. It is a good proxy for the REIT sector.  It currently sports a dividend yield of 4.0% which still makes it very attractive to yield seekers, but PE ratios of REIT’s are getting rich.

I am not saying to run for the exits yet, I still own several REIT’s, but investors need to be aware once again, that no tree grows to the sky.

I am not quite ready to sell my DLR yet (one of the REIT’s that I currently own), but I am almost ready to quit crying “are we there yet?” as the summer vacation season throttles into full gear. We are fast arriving at my anticipated destination.

Income seekers are also gobbling up utilities like there is no tomorrow. Tomorrow always comes, however. Look at the U.S. Utilities ETF (IDU), it too is hitting new all-time highs. It currently has a dividend yield of 3.4%. Once again, this is a much more attractive yield than U.S. treasuries at just 1.46%. I continue to have a small position in IDU, but I am growing wary.

The average utility stock is now trading at the upper reaches of historical PE ratios. Take Consolidated Edison (ED) for instance, it is now trading at a PE ratio of 21 when the long-term average has been more like 15x.

Utility investors need to be ready to cash in at some point before the lights go out.

As yields continue to go lower and lower, preferred stocks continue to go higher and higher. This preferred stock ETF (PFF) still sports a dividend yield of 5.7%, but preferred stocks are also reaching for the sky right now.

But, the biggest bubble of all is forming in bond markets all over the world. Japan, Switzerland, and Germany all currently offer negative yields, while the yield on the ten-year, U.S. treasury looks like it is headed for 1.25% or lower!

This is great news for borrowers, but continued bad news for savers and retirees who are playing their part in financing mounting government debt. While retirees are getting squeezed, government budgets continue to get fatter.

One has to wonder just how sustainable this trend is. Can you imagine what will happen to borrowers when even a hint of inflation begins to show up in the economy? Markets will have to take rates higher at some point in time, and this will more than likely lead to the next big financial crisis.

Lenders will also be in trouble as rising interest rates will eventually crush debt-laden borrowers. We do not need to look any further than Greece for the ramifications.

The Muni bonds bubble is growing…

No, this is not a 5-year chart of internet stocks above, it is a chart of the National Muni Bond index! It currently sports a dividend yield of 2.3%, and investors continue to gobble it up. How much higher can it go?

The answer lies in “how much lower can interest rates go?”

There is also a feeding frenzy taking place amongst dividend paying stocks. They had one of the biggest weeks that I have ever seen.  The Dow Jones Select Dividend Total Return Index continues to hit news while the Dow Jones Industrial Average continues in a sideways funk. A divergence like this is always worrisome. The next phase is euphoria, and then…

I said before the Brexit vote that earnings were a much bigger factor to focus on. So far, earnings expectations have not been impacted by the “leave” vote. We will get much better idea in coming days however, as earnings season fast approaches, but now we have to weigh in the possibility of big question mark hanging over the future leadership of our country.

In summary, I see several very ominous bubbles forming. It is not time to jump ship on them yet, but I would not get to passive about them either.

I still maintain a 2,300 target price on the S&P 500. This is still good enough to keep me bullish on U.S. stocks for my eighth year in a row. I will turn bearish at some point in the future, however.

Chaos during the upcoming presidential conventions could turn me to a bear real fast.