Stock Market Volatility During Presidential Elections

Argentina checks all the boxes of a typical “banana republic”: an agriculturally-based Latin American country prone to unstable politics and economy.  The country has gone through centuries of dictatorship, socialism, economic recession, hyper-inflation, debt default, currency devaluation, and price controls (in no particular order).  Recent years have not been different.  In December of last year, the country elected a new President that promised change and pro-growth reforms.  Argentinian stock markets have responded with volatile but positive performance, having risen 13% year-to-date.  At times, a stock market can be thought of as a reflection of investors’ collective expectations for the economy.  In this case, Argentinian stocks are perhaps signaling cautious optimism.  Since the country defaulted on its national debt payments in 2001, the country has withdrawn from the global market stage, falling in stature and importance relative to other countries.  Indeed, in 2009 the country experienced the ignominy of having been demoted from the ranks of emerging market countries (by index provider MSCI) and into the lesser realm of frontier markets (a term usually reserved for the least developed countries globally).  Given its fall in global economic importance, one would expect local events such as electoral politics to have greater importance and effect on the local stock market.

Some of our clients have asked us recently what effect this year’s unusual presidential election is having on the stock market given its peculiar, if not amusing developments (to some of us at least).  After all, presidential elections usually don’t feature “outsider” candidates in both parties, nor is the term “contested election” normally used with such realistic probability (on both sides of the aisle).  However, the United States is no banana republic.  The U.S. economy, as sluggish as it may seem, is still the largest in the world and the only one that seems to offer any kind of consistent growth since the Great Recession (at albeit low levels).  Yet, it has been extremely difficult to assess whether or not the economy has actually turned the corner.  Economists and investment pundits regularly (still) and vigorously debate the state of the economy (and by extension the prospects for the stock market).  The stock market seems equally perplexed and at times directionless, as it contemplates future action by the Federal Reserve.  Will they or won’t they (raise or lower interest rates)?  Do they see recession (deflation) or growth (inflation) in our future?  This year, we could add the presidential election to the list of drivers for the stock market.  But unlike Argentina, the United States is both globally connected and a major factor in the global economy.  It is both a source and a recipient of volatility (from other countries).  The country is intertwined with most other countries on the global stage and beholden to both fundamental (earnings) and non-fundamental (everything else) factors that drive global economics.  This is true because many U.S. corporations derive a large degree of revenues and earnings from abroad.  The United States does not operate within a vacuum and is affected by global macro drivers.  As we have said in previous notes, the slowdown in China and European austerity has had major repercussions on interest rates, currency, and commodity prices.  While it’s true that an election in the eighth year of presidential term offers uncertainty (see attached chart), we are not convinced of its impact given the host of other drivers of stock market volatility.  We would also note that as far as presidential elections go, most volatility is exhibited during elections that follow economic recession where the electorate is already uneasy regarding their own finances.  That is not the case this year.  We would say the U.S. election has had a comparatively minor effect on stock market volatility.  To the extent that there is increased volatility and negative performance in stocks, it may just be reflective of seven straight years of stock market advances and some wind coming out of the sail of enthusiasm.

S&P 500 Price Changes During Presidential Cycle

Indexes are not available for direct investment.


Regardless of stock market volatility and what actually drives it, we welcome it whole heartedly.  To the extent that there is volatility stemming from non-fundamental (or “macro”) events, we would welcome it as that means dislocations and mispricing in the market.  We are high quality, long-term, bottoms-up value investors that focus on company specific fundamentals to determine their investment worthiness.  If macro issues cause the stocks of the companies we invest in or would like to invest in to fall, we will look at the event as an opportunity to own (more) shares at better prices.  We seek to take advantage of short-term volatility to generate long-term value.  A few months ago, we wrote a note discussing our belief in the country and what it continues to offer above and beyond what others do.  We think that regardless of your political leanings, or whether or not you agree or disagree with any particular politician, president, or candidate, there are strong reasons to believe in this country, what it offers, and that it will continue to do so in the future – despite any disenchantment you may currently have in its leadership.  In the note, we discussed our support for Warren Buffet’s comments regarding the future welfare of our children.  To paraphrase, he said that babies born today are the luckiest ever.  What he meant, and what we also believe is that despite the country’s faults (and there are many), the United States is still the best country in the world to live and raise a family.  We mentioned that one only has to look at the lengthening lifespans of our population to understand that our quality of life is superior to that of the rest of the world.  This nation was created by very smart people who constructed numerous safeguards or checks and balances into our political system to ensure that the country could not be moved too quickly or too strongly in any one direction, and without general consensus and enough time to thoughtfully think through potential changes.  We still believe this is true.  We also believe that one should not change their long-term goals due to any temporary shift in short-term politics or mood.  After all, volatility in the short-term allows for gains in the long-term if you are opportunistic.  Again, we would consider any volatility driven by non-fundamental sources to be opportunities.  We hope that you do too and would once again like to thank you for your continued trust in us and our ability to help you reach your long-term investment goals.  Please contact us with any questions or concerns you may have.


The foregoing content reflects the opinions of Horan Capital Management and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.


Past performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.


All investing involves risk, including the potential for loss of principal. There is no guarantee that any strategy will be successful.

Taking a Page from Warren Buffett

As you know, Warren Buffett is one of several investors from whom we draw upon for our mélange or brand of value investing. Among the preferences he espouses is that for high quality businesses that have strong financial strength and that can operate from within a franchise or with a strong economic moat (i.e. a strong and defendable competitive advantage). These businesses generally exhibit wide margins, generate strong free cash flow, and earn high returns on invested capital. We combine these good operational characteristics with a value approach that seeks to purchase shares in these exceptional companies at a discount to what we believe is intrinsic value. We believe that the combination of the two practices offers a time-tested investment technique that can continually add value for our clients.

Every year, Mr. Buffett pens a letter to the shareholders of Berkshire Hathaway, imparting a bit of his wisdom. Although we do not share every opinion in the letter, there are many principles and assertions that we can agree on. Below are some of the points discussed in the letter and our comments regarding them:

  • “The babies being born in America today are the luckiest crop in history”. We would wholeheartedly agree. Mr. Buffett is speaking generally here, but we need only look to our lengthening lifespans to understand that our quality of life is the envy of the world. There are more centenarians (persons aged 100 years and older) living in the U.S. today than there have ever been (since tracking first began). Advances in modern science and innovation have produced a climate that has fostered healthier lives and wealthier prospects for Americans, like never before. However, this increase in our livelihood comes with its own set of challenges. Americans, many of whom were already struggling to build their wealth and meet their long-term investment and retirement goals, may find that their longer potential lifespan increases the likelihood that they outlive their accumulated wealth. We believe that this increasingly likely prospect is underestimated by even the most well-off amongst us.
  • Mr. Buffett suggests added safety nets to alleviate job displacements due to technological or productivity progress. Entitlements have long been a political point of contention in American politics. Social Security in particular is referred to as the third rail of American politics. The theory is that because emotions run so strong regarding the topic, it would be political suicide to discuss changes to it. However, we are not politicians and we do not think the issue should be political. We are not espousing a recommended solution here, but pointing out a clear threat to clients’ investment and retirement goals. Along with Medicaid/Medicare (which in fact are more imminent threats), Social Security faces serious funding issues. One need only look at the trend in the ratio of workers to retiree to understand the immensity of the problem. In 1940, there were roughly 35 million covered workers to 222 thousand retired beneficiaries; a ratio of 159 to 1. Today, that ratio stands at 2.8 to 1. At some point in our lifetime, the economics of the program need to be altered to reflect reality (either through changes to contributions (higher taxes) or distributions (cuts to benefits or delayed retirement age)). Depending on how they are changed, it could materially affect your goals. Together with longer expected lifespans, these changes have the potential to threaten even the strongest retirement plans. We believe most investors are underweight the long-term growth assets (such as stocks) necessary to help them reach their goals.
  • “America’s economic magic remains alive and well”. Although we have gone through a long stretch of sub-optimal growth in the U.S., it is still the envy of the world. This is affirmed by the strength in the U.S. dollar and the positive direction in domestic interest rates. The world, for the past several decades has used our currency as a safe haven – even more so since 2008. However, this does not win us a reprieve from what ails the rest of the world. We are finding that the world is quite tangled or “coupled” due to greater globalization among companies and economies. Much of the volatility in investment markets over the past year has had its roots in foreign markets. However, a steady hand and a commitment to being opportunistic allows the patient investors to capitalize on market dislocations.
  • Berkshire Hathaway increased its position sizes in several publicly traded portfolio holdings. Value managers generate a good deal of their value-add by increasing their exposures to holdings in their portfolio that have declined for non-fundamental reasons. These are companies with which the managers still have high conviction. Falling stock prices for non-fundamental reasons allow value managers like us to lower our cost basis in our investments. Combined, lower cost basis and greater exposure (position sizes) allow the portfolio to recoup its losses faster and to outperform sooner than otherwise. We have used the market volatility in 2015 to do this on several occasions.
  • Berkshire Hathaway acquired aerospace components manufacturer Precision Cast Parts in 2015 for $32 billion in cash. We too have noticed the opportunity in U.S.–based industrial and manufacturing companies. Short-term cyclical factors including poor global economic activity, volatile exchange rates, and falling energy/oil prices have combined to punish these companies. As these factors are not fundamental in nature, we have taken the opportunity to either increase or start positions in so called capital goods companies. These are stalwart companies which we find are representative of the backbone of America and our economy. It would be quite pessimistic to not think that they will rebound over the next several years – in parallel fashion to our own economy.
  • Warren Buffett has an affinity for companies run by great management. We agree and would add that first and foremost, the underlying business needs to be “fool” proof in the most literal sense. These companies have such a strong operational profile that even the most incompetent manager can run them without destroying them. The primary investment criteria is to always invest in companies with great business fundamentals that can operate well without much input from management. Great management has the potential to make these companies even more special. In some cases, these great companies will sell below intrinsic value due to poor stewardship. We will invest in these companies if the discount offers enough compensation for the poor management. We will look to a change in management as a catalyst to propel the
    stock back to full valuation.

For more information and insight into the mind of Warren Buffett, you can read the complete Berkshire Hathaway 2015 Client Letter at the following link. (

To discuss the above topics or anything else that is on your mind, please contact us at your convenience. We are always available to help you navigate this shifting landscape.


The foregoing content reflects the opinions of Horan Capital Management and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. All investing involves risk, including the potential for loss of principal. There is no guarantee that any strategy will be successful.

Does the stock market care who wins the election?

As far as we can tell, not really.

With the 2016 presidential election races dominating the news right now, we thought it might be interesting to see how the stock market has reacted in election years and in the newly elected President’s first year in office.  We compiled the information below as far back as the inception of the S&P 500.  This encompasses 22 presidential elections beginning in 1928 and ending with 2012.

Does the stock market care who wins the election

There is no guarantee that any historical trend will continue. Indexes are not available for direct investment.

From our vantage point, the only trend we see is that no matter how you slice it, the average return in all of these scenarios is positive.  In the 22 election years covered, there were 18 positive years and only 4 negative return years, with the highest and lowest returns being 43.6% in 1928 and -37.0% in 2008 respectively.  In the year following each election year, the numbers are not quite as favorable with 12 positive and 10 negative years, but still positive on average.

As you know, our investment philosophy focuses on bottoms up research with detailed valuation analysis done at the company level.  We are agnostic to macro-economic events unless they provide us opportunities whereby stocks are under or overpriced.  Do we care about who wins the election?  Of course we do, but as it pertains to the direction of the country as a whole.  Will it change the way we value business?  Not at all.  We will stick to our knitting no matter who is elected.


2015 Experienced Significant Volatility

Market Review

  • Equity markets outperformed fixed-income markets with the S&P 500 climbing 7.04% (including dividends; 1.38% YTD) and the Barclay’s Capital U.S. Aggregate Bond index falling 0.60% (up 0.58% YTD).
  • Small caps underperformed large cap stocks (S&P 500) as the Russell 2000 returned +3.59% (down 4.41% YTD). Small cap stocks have also underperformed large cap stocks over the past three and five-year periods as well.
  • Growth outperformed value across all market capitalizations and over most periods since the 2008 market decline (Qtr/YTD/1/3/5-year, etc.).
  • Non-U.S. markets (MSCI EAFE**: 4.75% in USD; -0.39% YTD) generally underperformed U.S. equity markets. However, non-U.S. markets outperformed U.S. markets in local currency terms over the full-year period (+5.78%).
  • Emerging markets underperformed developed markets (MSCI EAFE**) as the MSCI Emerging Markets Index rose 0.73% in USD (-14.62% YTD).
  • Japan (+9.38%; +9.90% YTD) and Australia (+10.0%; -9.77% YTD) were notable based on their strong performance gains during the quarter. Brazil and Canada were notable based on their strong weakness during the full-year (-41.2% and -23.6%, respectively). (All quoted in USD).
  • All U.S. market sectors were positive during the quarter. Energy and Utilities were most distinguishable given their relative weakness (+0.20% and +1.10%, respectively).
  • The U.S. corporate bond sector fell 0.11% during the quarter, but rose 0.63% YTD. 10-Year U.S. Treasury yields rose from 2.06% at the beginning of the quarter to today’s 2.28%. High yield bonds fell 0.95% during the quarter and -3.00% for the year.
  • The U.S. dollar rose +2.7% (+5.47% YTD) versus the British Pound (as well as versus most other currencies); +0.44% (+0.33% YTD) versus the Yen; and +2.68% (+10.23% YTD) versus the Euro.
* Unless otherwise noted, performances stated above reflect data provided by Standard and Poor’s, Russell Investments, MSCI, and Barclay’s Capital.
** The MSCI EAFE Index is a large capitalization, developed market benchmark that tracks non-U.S. or foreign equity markets.

Market Commentary

A strong quarterly gain (+7.0%) helped the S&P 500 post a slightly positive re­turn of 1.38% for the year. This might seem rather meek considering recent history. Given the seven years of positive annual returns the market has notched since the 2008 Great Recession, you can perhaps forgive some for their lack of enthusiasm. This year’s performance was the lowest of the previous seven years. How­ever, if this is the worst of a post-bull market sell-off, we’ll gladly accept it. The year experienced significant volatility driven by among other things, global economic uncertainty. As we have written throughout the past year, macro issues dominated the year and no region in the world was particularly immune. Eu­ropean/Japanese QE (the loosening of economic policy), falling oil/commodity prices, a slowing industrial economy in the U.S., rising U.S. interest rates, U.S. dollar strength, Greece capitula­tion, and tepid Chinese growth (did I miss any?) were some of the major headlines that helped sway markets. Also, fall­ing gasoline prices failed to spark retail spending as domestic consumers chose to bank (deposit) their savings rather than spend it. Apparently, increasing interest rates (or at least the anticipation of it) was compelling enough to induce consumers to save. Or perhaps it was a lack of confidence in the overall economy or state of national politics? Weak foreign currencies forced many overseas consumers to stay home (or close to it) rather than travel to the U.S., spending their discretionary funds on cheaper products locally or in other countries (be­sides the U.S.).

Performance in U.S. equities was perhaps even dimmer considering it was helped in large part by a few social media or tech-related companies (i.e. the FANA or formerly FANG stocks: Facebook, Amazon, Netflix, and Alphabet (formerly known as “Google”)). Without these stalwarts, investors would have even less to cheer about as safety won out over risk. This was evident as small cap stocks trailed large caps and growth trumped value. Indeed, both trends have been in play gener­ally since 2008, as interest rates have been low and oil/com­modity prices have fallen into bear markets (affecting the bank and energy stocks in the indices and in many “value” investors’ portfolios). More recently, utilities stocks (typically favored by value managers or investors interested in higher yields) have also been negatively affected by rising interest rates. As such, U.S. equity markets barely beat fixed-income (bond) invest­ing which returned 0.58% in 2015. Fixed-income markets also exhibited considerable risk-aversion during the year as the spread (difference) in performance between U.S. Treasuries and high yield bonds was over 350 basis points (in favor of U.S. Treasuries). “Junk bonds” from companies in the en­ergy patch were particularly poor performers during the year for obvious reasons. International equity markets held up surprisingly well in local currency returns, considering the numerous negative headlines experienced. These markets gener­ally underperformed U.S. equities in U.S. dollar terms (due to the U.S. dollar’s strength) but outperformed in local currency terms. This was perhaps driven by optimism regarding the success of the aforementioned loosening of economic policies in several economic blocs globally.

2015 was a very difficult year for investors. And, by the time our clients read this Mar­ket Review and Commentary, they will know that the start to 2016 has been equally challenging. However, we cannot think of a better time to remind you of our value investment philosophy or to impress upon you our dedication to long-term invest­ing. Our investment philosophy and time horizon combined, allow us to protect our clients versus volatility, and more importantly, the permanent loss of capital. We view market volatility and dislocations as opportunities to be capitalized upon. As fear enters the market, it compels some investors to make irra­tional decisions. They sell into a falling market for reasons not fundamental to the investment, but based on emotions. We will make the best of a sub-optimal situation by being opportu­nistic. Clients that have extra funds set aside or were already thinking to add to their portfolios, may wish to use the poor start to the year by doing so now. Also, we would like to remind our clients that we would welcome the occasion to meet and discuss our services with any family or friends that may have interest. Please do not hesitate to share us with them. We are optimistic in this New Year but will continue to be vigilant in our task. We wish all of our clients the best, and hope that the year ahead is both rewarding and prosperous.

2015 Year End Checklist

With the year quickly coming to an end, it’s not too late to review your finances for the year and make sure you did not miss anything important.  Here is a checklist of items to review between now and the end of the year:

  • Harvest your tax losses – review your capital gains exposure for the year and sell off positions in your portfolio with losses to offset the gains
  • Review your asset allocation – portfolio allocations will shift throughout the year, now is a good time to see if your portfolio needs to be reallocated
  • Maximize your gifting for the year – you are able to gift up to $14,000 per person per year without needing to report a taxable gift
  • Complete your Required Minimum Distribution – the IRS levies a stiff penalty of 50% of the amount not distributed
  • Did you change jobs and leave behind a 401k plan? – leaving a retirement plan behind may limit your investment choices and control of your money
  • Spend down your Flexible Spending Account (FSA) – unlike a Health Savings Account, FSAs must be depleted by December 31st
  • Review your spending for the year – the end of the year is a good time to review what you have spent over the last twelve months and set a budget for the following year
  • Last chance to max out your retirement plan or HSA for the year – review your contributions and make sure you have contributed the maximum allowed if that was your intention
  • Review any Roth conversions done during the year – if you completed a Roth conversion earlier in the year, check to see what the value of that conversion is today. You may have the opportunity to undue the conversion and redo it at a later time.

And a few ideas to get a head start on 2016:

  • Did you experience any major life changes in 2015? Have a baby, get married or divorced, change jobs or receive an inheritance? – contact your financial advisor to discuss the impact on your finances
  • Will the changes made to Social Security affect you – changes made to Social Security may alter the claiming strategies you intend to use
  • Review beneficiary designations and estate plan – make sure your wishes are still up to date and reflect any changes in your life
  • Check your credit report – are you planning a large purchase? Make sure there are no surprises on your credit report
  • Review your financial plan or start one today – we are here, ready to help!


Best wishes for happy holidays and a prosperous New Year!

A Market Selloff Is A Positive Not A Negative

From a philosophy standpoint, Horan Capital Management follows a value, bottoms up investment philosophy.  This means that we do not make investment decisions based on headline or macroeconomic news.  We comb the universe of stocks for high quality companies that have sustainable economic moats that ensure their viability and competitive edge.  Once we find these companies, we wait for the market to price them to our satisfaction, allowing for an adequate margin of safety.  And though we do not heed market noise and its temporary effect on our existing investments, we do take notice when the market irrationally, and temporarily misprices an investment we are interested in.  We are price takers and market noise is what creates opportunities for us as investors.  We do not profess to catch the bottom of a stock price cycle, but we believe that over the long-run (3-5 years in many cases), our clients’ portfolios will benefit from this methodical strategy and will outperform.  To be clear, we seek to invest in high quality companies that have a sustainable franchise or competitive advantage (some call this an economic moat), at a price below what we believe to be intrinsic value.  We can determine the company’s quality and/or the strength of its economic moat based on historical financial data.  The best companies, or the ones in which we like to invest, exhibit (though not always) wide margins, strong free cash flow generation, and high returns on invested capital over a long enough period where we can safely say there is persistence.  We assume that our investment decisions will yield good absolute performance annually and outperform relative to the market over a full market cycle.  In layman’s terms, we view the recent downturn in the market as a buying opportunity for great businesses at discount prices, which is what we have been doing over the past several days and today.

As value investors, we believe our style inherently provides downside protection.  This comes in two ways.  We naturally buy stocks we believe are underpriced on an absolute basis.  That is, they are priced below our estimation of their intrinsic values.  Secondly, most of the time (though not always), our stock picks will also be undervalued on a relative basis to the market, peers, or even the particular investment’s own trading history.  In most cases, these investments will display a low correlation to the market.  This is not always the case on an individual stock level, but should be so on a total equity portfolio level.  Thus, as the market gyrates, collectively, the HCM core equity portfolio should naturally exhibit downside protection

As active managers, we review our clients’ portfolios constantly.  In the event of a market correction, we review our current holdings to determine if there is a fundamental change to its business model that may change our investment thesis for the stock.  The real value we can add during a market swoon is through selective or opportunistic purchases.  In many cases we will add capital to existing portfolio holdings that we believe are selling at ridiculous prices.  Other times, we will look to add new positions in companies we have followed in the past but had deemed too expensive for purchase (our “buy list”).  Like our own portfolio holdings, we try determine if there is a fundamental change in the company that disqualifies them from purchase.  If not, we will accept the good fortune that the market has presented to us.

Lastly, given our long-term time horizon, we tend to hold onto our investments through time, allowing them to compound in value.  We view market corrections as short-term events.  Studies show that with almost certainty, equity prices increase with time horizon.  By utilizing the aforementioned active management steps, and adhering to a long-term time horizon, we protect the portfolio from short-term market corrections and exert prudent investment discipline in the face of trying times.

As always, we are here for you.  If you have any questions about your portfolio, please call us. 


When is the right time to file for your Social Security benefits?

Social Security

Filing for Social Security benefits is one the most important financial decisions one can make in their lifetime.  While life expectancies continue to move higher, choosing to start benefits as soon as possible without weighing the long-term implications could mean leaving $100,000 or more of cumulative lifetime benefits on the table.  The choice you make will not only impact the benefits you will receive while you are alive, but it can also impact the benefits available to a spouse after you pass away.

The choice of when to begin benefits goes beyond trying to maximize cumulative lifetime benefits.  Your Social Security decision should also incorporate other sources of income you anticipate in retirement such as part time work, pensions, your retirement savings, longevity expectations, health issues and other financial obligations.  While the success of the strategy selected relies heavily on the accuracy of the assumptions made, it is still an important process to complete when considering your options.

Recognizing the importance of choosing the right strategy for claiming your Social Security benefits, we have added a new resource to assist clients in making the best decision based on their unique situation.  We will help you construct a strategy to get all the money you are entitled to, using the current rules to your advantage.  You should not rely on Social Security Administration to provide you with a recommendation that best fits your personal financial situation.  If you are nearing retirement or eligibility for Social Security benefits, let’s discuss your options.