Ariel Investments commentary for the month ended January 31, 2016.
This January there have been two hot news topics: the volatile and declining stock market and the 2016 Presidential race. As for the market headlines, some report it as the worst open to a stock market year ever, but it certainly is not the worst January return in history. In politics, both primary races are more heavily contested than one would have imagined at first blush. Here, we have no desire to be partisan or to predict any outcome. Our point is simply to emphasize that while the stock market and the political arena might sizzle in the short term, only the long term really matters.
Ariel Investments – The 2016 Iowa caucuses
The 2016 Iowa caucuses have just concluded. We all know the news. On the Democratic side, favorite Hillary Clinton and challenger Bernie Sanders were statistically tied, with Clinton winning by just 0.3%. In the Republican race, three of the 12 candidates soaked up all of the press. Senator Ted Cruz garnered 28% of the vote. Donald Trump led in the polls for months but finished second with 24% of the vote. Meanwhile, Marco Rubio managed a close third-place finish with 23%, beating expectations and leading many to conclude he had the best result. Many are now certain these results mean a great deal.
Frankly, we have no idea. We do know a year from now there will be a new President. Before that, there will be a Democratic and a Republican nominee. A decade from now Americans will be able to name the winner of the Presidential election and maybe the challenger from the other party. However, few will recall the winner of the 2016 Iowa caucus. Moreover, history shows the Iowa caucus does not predict the nominees or eventual President especially well.
For example, looking at the seven elections dating back to 1988, and excluding caucuses where a sitting President was running unopposed, the eventual nominee won the Iowa caucus only half the time. For the Democratic Party, the winner of the Iowa caucus won the nomination on three occasions, but lost twice. Among Republicans, the Iowa caucus was predictive just two times, while the other three times it was not. And, frankly, there were some humdingers among the results. In 1988, Bob Dole got 37% of the Iowa votes, but George H. W. Bush won the overall election after just a 19% share in Iowa. In the 1992, Bill Clinton won the presidency but got only 3% of the Iowa Democratic vote—Tom Harkin garnered 76%. Later, in 2008, Republican Mike Huckabee received 34% of the Iowa vote, but John McCain—despite a 13% finish—won the nomination.
In the fullness of time people may not remember that Hillary Clinton barely won the Iowa caucus. Or it may be eventually seen as the beginning of Sanders’s surge. On the Republican side it is even murkier, and almost certainly two of the top three contenders will become historical footnotes in this election.
Ariel Investments – Stock market performance
All this actually relates back to the stock market performance in January. Indeed, the S&P 500 Index fell nearly -5%, and the Russell 2000 Index dropped almost -9%. Some claim this portends doom and suggests it is the worst January for stocks ever—or at least in a long time. Yet just seven years ago, in 2009, the S&P dropped more than -8% and the Russell 2000 skidded -11%. For the whole year, however, large caps gained +26%, and small caps surged +27%. In other words, the worst January in recent memory utterly failed to predict what would happen that year. In 2003, the Russell 2000 dropped nearly -3% in January but leapt +47% for the year; the S&P also dropped almost -3% in the first month but gained +29% for the full year. To put it succinctly, a bad January does not mean the race is over, and moreover it is not a particularly good indicator of how the race will go. Moreover, a decade later, few are likely to remember one month’s results. So, as always, we counsel patience and prudence and suggest keeping your eyes on the long-term horizon, not the news ticker.