Reed Between The Lines

Reed Between the Lines: Storm Clouds and Turkeys

25 November 2019

By: J. Reed Murphy, CIO

Contributions by: Rob Young, CFA and Cliff Aque, CFA

Happy Thanksgiving! In this world of trade tariff tantrums and political polarization, we take a high level view of last year’s tumultuous stock market, how things may be different this time and settle in with a lighter note. 

We are just over the half-way mark for the fourth quarter of 2019 and many still remember the dramatic drop in the domestic equity markets during the fourth quarter of last year and specifically the month of December. Are the storm clouds that existed then passing through again? Are there new storm clouds on the horizon?

Investors are now cautiously watching the impeachment process. We believe it is instructive to review what caused the market down draft last year and how this year may or may not be the same. We will also take a look at past impeachments and how the markets played out.

In my quest to look at the bigger picture and read between the lines, let’s take a closer look.

Storm Clouds? Just How Bad Was the Fourth Quarter of 2018?

The fourth quarter of 2018 was remarkable. Consider the following:

The reasons for the market’s drop were many but may be primarily attributed to the following;

We would be remiss to not mention that there were other concerns driving uncertainty in the markets during 2018, including, but not limited to, concerns for a global economic slowdown and the threats of a government shut-down.

So, as we are amidst the mid-point of Q4 2019, what has changed?  The most obvious answer is a shift in Fed Policy to a more dovish stance in both rate movement and outlook, which has been confirmed by international central banks (Exhibit 1). Heading into Q4 2018, the U.S. Fed raised interest rates eight times, which was then capped off with the contentious December rate increase making nine straight hikes.  In 2019, the U.S. Fed has reduced rates three times and credit markets are suggesting risk is well below December 2018 levels.

Exhibit 1: Global Central Banks Have Pivoted To A More Dovish Stance

Source: Schwab

In addition, there appears to be much more progress on the trade war front with Canada, Mexico, European countries and China. China represents the largest issue in this camp. Despite the fact that the drama continues and is now more complicated with the unrest in Hong Kong, there has been much more progress and more clarity than in late 2018.

Exhibit 2: Storm Clouds

A Look at Historical Impeachments

Markets generally adapt to changing political environments. Nonetheless, there is certainly a lot of attention being paid to the current impeachment proceedings. A look at historical impeachments provide some context.

Impeachment proceedings are uncommon in the U.S. --- Andrew Johnson (17th President) was impeached on March 2-3, 1868, but the two more recent occurrences were President Nixon and President Clinton.  Nixon resigned before the formal process concluded and President Clinton was impeached in the House, but it wasn’t confirmed by the Senate. 

Using market performance under the Nixon and Clinton impeachment proceedings, we can extrapolate that while risk in Washington is notable, it’s historically more transitory than a structural change (Exhibit 3 & 4) and those periods may have been more impacted by other events.

Exhibit 3: Impeachment Proceeding Risk During Watergate Proved Transitory

Source: Bloomberg
Past performance is no guarantee of future results. 

Exhibit 4: Impeachment Proceeding Risk During The Late 90’s Proved Transitory


Source: Bloomberg
Past performance is no guarantee of future results. 

While we cannot forecast what may be the final outcome of the current Trump impeachment process, we do believe that markets will settle in on longer-term economic issues. If the market’s performance over the past several years are an indication, it has climbed higher despite a constant dose of tempestuous tweets and political chaos. Perhaps the market has become immune to such events and will be more interested in tariff resolutions and economic data.

In the meantime, it is important to remember that trying to time market movements based on external news events is futile. Exhibit 5 shows that missing just the best 10 days dropped your annualized return from 5.6% to 2.0%. Missing he best 50 days provided a swing of nearly 11.5% annualized (5.6% to -5.9%).

Exhibit 5: Market Timing Doesn’t Work

Source: Bloomberg
Past performance is no guarantee of future results. 

However, realizing that diversification is important for long-term success, we can help manage shocks by employing strategies that either potentially protect in down drafts or provide asymmetrical risk and return opportunities. Those strategies may include, but aren’t limited to, market neutral, convertibles, global infrastructure and fixed income.


On a lighter note, we bring everyone a reminder that we are amidst the Thanksgiving season. It is helpful to give thanks to one another, particularly during these turbulent times.

We do know that the biggest losers during this holiday will be turkeys. Did you know?

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Calamos Wealth Management LLC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Calamos Wealth Management LLC.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Calamos Wealth Management LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  If you are a Calamos Wealth Management LLC client, please remember to contact Calamos Wealth Management LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Calamos Wealth Management LLC’s current written disclosure statement discussing our advisory services and fees is available upon request.