The Chicago Cubs erased 108 years of excruciating losses with an exciting 8-7 win over the Cleveland Indians in Game 7 of the 2016 World Series on Wednesday night. Hats off to the Cubs, who erased a 3-1 deficit, but also to their fans, who rank among the most loyal supporters of any sports team in the world.
You may recall that we opened the 2016 baseball season with some thoughts on the bond market:
Then
To put 1908 – the last time the Cubs won the World Series, over the Detroit Tigers – in perspective, the Dow Jones average was approximately 82. It started the year at 59 and closed the year at 86. (Source: Federal Reserve Bank of St. Louis) The stock market was recovering from the Panic of 1907, which saw the market decline approximately 50% due to concerns about bank liquidity.
The U.S. 10-Year Treasury bond was yielding approximately 3.8% (compare that to 1.8% now). There were no tax-exempt municipal bonds, as the federal income tax did not exist until 1913. And the price of oil was 72¢ per barrel.
Radio was in its infancy, so people heard about the Cubs through the newspaper or word of mouth. The 1908 Presidential election saw William Howard Taft, a Republican Secretary of War and Theodore Roosevelt’s hand-picked successor, solidly defeat Williams Jennings Bryan, the Democrat (and a Populist), who was running for the third time, having lost in 1896 and 1900 to William McKinley. The United States then comprised 46 states, with Oklahoma having joined the union just the year before.
And Now
We again have a populist running for President with Donald Trump battling insider Hillary Clinton. The US Treasury market has seen yields climb from the post-Brexit lows. The 10-year US Treasury has risen from 1.35% to 1.80%, and the 30-year Treasury bond has climbed from 2.10% post-Brexit to its current 2.60%. (Note: The U.S. 30-Year Treasury bond did not exist in 1908 – it came into being in 1976.) However, for 2016, overall bond yields in the intermediate and longer end of the market are down approximately 50 basis points.
Equities have moved begrudgingly lower since August, with the Dow Jones falling from 18,404 at the start of August to 17,983 now, a drop of 2.3%. Certainly, the Presidential election five days from now has created an air of uncertainty in the markets.
Our Thoughts
The Electoral College math is still daunting for Trump, but there has clearly been a tightening of the race in the past few days. Part of this is the Clinton email controversy, but most (not all) Presidential elections tend to tighten in the last couple of weeks prior to voting. Barring a 2000-style undecided election, by next Wednesday we will have the outcome of the Presidential race as well as the makeup of Congress.
Markets should like the certainty of knowing the next President – whoever it is. The most likely outcome for Congress is a Senate that changes from Republican to Democrat and a House of Representatives that stays Republican. In other words, divided government. We know that, overall, markets like gridlock. The equity markets should go back to concentrating on improving earnings, continued lower unemployment, a bottoming out or improving labor participation rate, and low (though slightly rising) inflation. We think the bond markets will key on the fact that intermediate bond rates (think the 10-year Treasury bond) are still below the rate of core inflation and will slowly work their way higher. We expect the Federal Reserve (also not around in 1908 – it was born in 1913) to hike short-term rates in December as the economy continues to improve. Bottom line: equities should do OK, and it’s time to become somewhat defensive in bonds, which we have done.
Congrats to the Cubs and Indians for a great World Series. No one should have to wait 108 years.