Second Quarter 2016
Volume XIII, Issue II
OUR TAKE ON THINGS
emerged over the years—but if you examine the data,
the results may surprise you.
Politics and its Impact on the Markets
For example, you may have heard that markets perform
better under pro-business, anti-inflation Republicans
than they do under anti-business, spendthrift Democrats. But that theory just isn’t supported by the data. In
fact, over the last 100 years, the Dow Jones Industrial
Average has gained nearly fifty percent more under
Democratic leadership than it has under Republicans.
The stock gains, however, are offset by bond performance, which has been decidedly better under Republican regimes.
L
et’s talk politics. Wait! Where are you going?
In this colorful and heated (okay, dysfunctional)
political season, it’s no surprise that Americans on both
the left and the right are anxious and exasperated.
But they’re also curious. One question that comes up
every presidential election season is what impact the
election itself and the policies of a new president will
have on investment returns. Investors want to know if
they should adjust their portfolios, and if so, how to do
that in the turbulent period ahead.
To refresh our own thinking on the matter, we revisited some of the leading studies on how markets perform
based on the party in power.
The studies reinforced what we already knew to be
true: there is no hard evidence that election results play
any material role in investment outcomes. Bipartisan
political maneuvering, no matter how unseemly, historically takes a back seat to more powerful market impacts such as prevailing economic conditions, the geopolitical environment (wars, taxation, and austerity
measures), and other long-term secular trends. It is
these factors, not who is elected president, that drive
your portfolio.
Which isn’t to say we can’t glean something from looking at election cycles. Various correlation theories have
QUOTABLE
“Before borrowing money
from a friend, decide which
you need most.”
~American Proverb
The timing of a president’s election also plays a critical
role. Herbert Hoover, a Republican, took leadership at
the onset of the Great Depression, which lasted for the
duration of his term. President Roosevelt benefitted
from the subsequent recovery over the next three
terms. Should the party in power “own” these results?
Probably not—but when partisan data miners set out to
interpret results, they often find ways to make you think
so.
Does market performance vary according to the time
point within a presidential term? Possibly. Since 1968,
financial writer Yale Hirsch has tracked this relationship,
now called “presidential cycle theory,” in his Stock
Trader’s Almanac. Market data suggests that regardless
(continued on page 4)
PONDERING THE DOWNSIZING OF
AMERICA’S MIDDLE CLASS
I
f you were born before 1980, chances are you grew
up somewhere along the vast middle-class spectrum. Today, the middle class isn’t quite so broad,
and it sits at an uncomfortable tipping point. According
to the latest data from Pew Research, barely half of
adults (51% to be exact) are considered middle-class.
More troubling yet, in 25% of major metro areas, the
middle class is no longer a majority. That was true for
just 10% of metros in 2000.
(continued on page 3)
Page 2
GETTING VALUE OUT OF YOUR VACATION HOME
T
here are two great reasons for buying a vacation home: You want one and you can afford to buy it. Buying a vacation home as
an investment, however, should not be your primary motivation. Some vacation properties can also be good investments. Others aren't. As recent history has shown, real estate prices can go down as well as up, and there are no guarantees. There are,
however, some guidelines that can help you find a vacation home that will provide value along with pleasure.
The Rules Have Changed—Consider first whether you want to buy or rent and, if you choose to buy, where and how. There was
a time, back before tax-reform legislation in the 1980s, when there were compelling tax advantages to financing a second home. You
can still deduct mortgage interest on one such home, but unless it is income-producing property with its attendant complications, the
once-valuable depreciation write-offs are gone.
To help decide whether buying a vacation home is right for you, consider the following.
How Often Would You Use the Property?—If you plan to spend just one or two weeks each year at your vacation home, you
will probably be spending a lot of money for each day there. Mortgage payments continue all year long, as do payments for insurance,
taxes, and necessary regular maintenance. If you'd be paying full price but getting only part-time use, consider renting.
There are good reasons for buying a vacation home, not the least of which is a simple desire to own the place and do what you want
with it. But renting lets you experience vacation life in different places, and is relatively affordable. Rents can run from $500 to $2,000
a week or more, depending on location and amenities. At the end of your stay you close the door and forget about the place. Financial
planners say that if you're just looking for a few weeks of vacation a year, it's probably cheaper in the long run to rent. An extra attraction to renting is that it gives you a chance to test different locations before settling on one to buy.
How Desirable Is the Location?—The old real estate saying goes like this: "What are the three most important things about selling
a house? Location. Location. Location." The same holds true for a vacation home. Are you looking at a simple cabin in the backwoods
or a comfortable house or condo in or near an attractive resort area? A rural hideaway may be great for hunting, hiking, or just getting close to nature, but don't expect its value to appreciate as fast as a more comfortable place located near amenities.
With the graying of the Baby Boom generation, some analysts predict an increasing demand for country getaways in the future. That
great population bulge is rapidly approaching an age when many can be expected to spend the money they've been working for and
take life a bit easier.
Keeping that in mind, the best investment for future resale would probably be a fully equipped getaway that could double as a second
home, perhaps on waterfront property or with privacy-protecting acreage. Amenities are important. Younger people often don't mind
minor inconvenience, but older people look for microwaves, dishwashers, and even hot tubs. That condominium on the ski slopes
should not be "bare bones."
You Don't Have to Be Rich—The vacation home doesn't have to be a stand-alone house. A condominium purchase can let you
have a home in a terrific location that would be otherwise unaffordable.
For value today, look for that house, condo, or timeshare in a location that has activities in more than one season. Keep in mind, too,
that vacation properties often become retirement homes. So safety, taxes, and the availability of cultural opportunities should be considered. With those things in mind, look for bargains in lesser-known places; investigate upswing markets, places that haven't yet become overrun or overpriced.
Look for areas where the local economy is strong and taxes are low. You don't have to be near a city, but you should be within a
reasonable distance of populated areas to have access to services like quality medical care. Another reason for being near more populated areas is that such a location allows you the opportunity to try to rent out your property when you're not using it to help cover
mortgage payments and, perhaps, sell at a profit later on. With the right choices, returns can exceed the future payoff from stocks.
Tax Considerations
If you rent your home for 14 days or less a year, you do not need to report the rent. Beyond that, however, the IRS considers the
rent taxable income. But you may then be able to deduct all of your rental expenses if you had a net profit on the property
(deductions are limited if you report a loss). These are guidelines only; your specific tax obligations should be discussed with a qualified tax advisor.
This column was produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Rick Bryan,
a local member of the FPA. This communication is not intended to be legal and/or tax advice and should not be treated as such. Each individual's situation is different. You should contact your legal and/or tax professional to discuss your personal situation.
Page 3
MIDDLE CLASS...
(continued from page 1)
Not only is the middle class shrinking, it is struggling to
remain, well, middle-class. When I was a young kid in a
large middle-class family, my parents scraped and
clawed to buy a beachfront cabin they could barely afford. Later, they put all six of us kids into private high
schools—which were more affordable to begin with in
those days, and made more so with family discounts.
My upbringing, while pretty conventional by middleclass standards of the time, seems like it would be a
stretch for most of today’s middle class.
My perception was reinforced when I read an interesting recent article in the Atlantic, “The Secret Shame of
Middle-Class Americans,” in which author Neil Gabler
comments on surveys showing a large swath of middleclass Americans living paycheck-to-paycheck. In one
annual survey by the Federal Reserve Board, respondents were asked how they would cover a $400 emergency. A full 47% said they would have to borrow or
sell something, or they wouldn’t be able to come up
with the funds at all. A 2014 survey by Bankrate found
that only 38% of Americans could cover a $500 car
repair or $1,000 emergency room visit with their savings. Many of these respondents fit within the middleclass income profile.
most folks in need of cash. Today, offers of easy credit
arrive in our mailboxes and email inboxes daily, like free
candy. We often bite.
This reliance on credit suggests that many of the survey
respondents who didn’t have enough cash for an emergency did have the ability to fund it through their credit
cards.
Earlier generations of middle-class Americans, though
they often lived paycheck-to-paycheck, did at least have
a safety net for their retirement years. Pension plans
were a bulwark of middle-class employees through the
1970s, but by now, most major employers have abandoned them in favor of defined-contribution 401(k)s
and similar plans.
Many middle-class folks—the ones Gabler argues are
skating on thin ice—nevertheless make regular deposits
into their company-sponsored retirement plans. Unlike
pension plans, these plans can be tapped or borrowed
against to pay for emergencies, but also for less dire
needs, including weddings and vacations —providing an
escape route not afforded to the old-school pensioner.
Gabler goes on to relate (with a heavy dose of woe-isme) his own slide into the category of the 47% who
can’t pay for a $400 emergency. But along the way, he
paints an interesting picture of today’s struggling middle
class: “Financial impotence goes by other names: financial fragility, financial insecurity, financial distress. But
whatever you call it, the evidence strongly indicates that
either a sizable minority or slim majority of Americans
are on thin ice financially.”
Clearly, financially strapped Americans need to save
more and spend less. But the problem goes deeper than
that. Today, far more Americans live in large metro
areas than earlier generations did, and our metro areas
are expensive places to live. Wage stagflation and expensive credit exacerbate the problem. And of course
there is the housing collapse of a decade ago and the
subsequent Great Recession, perhaps the strongest
middle-class-killer of them all. Whether it proves to be
a redefining moment or merely a temporary knockdown remains to be seen.
If you are a client of Conlon Dart, chances are you have
not been in this position for many years, if ever. But
many folks you know certainly have been, whether they
admit to it or not.
In the meantime, America still has a middle class, even if
it is trending towards minority status.
How did America get to this place? The reasons are
many and complex, but a good place to start is with
credit cards. A recent study says that 38% of households have credit card debt and the average balance is
more than $15,000. A generation ago, access to a discretionary credit line was more difficult to obtain. More
important, credit was not the first line of defense for
What needs further exploration is how today’s middle
class is doing. Recent data on living standards, as Gabler
points out, seems to suggest the middle class is less well
-off than it was in the past. If this is so, the unanswered
question is whether America can get this oncedominant class righted and back to having the standards
that my parents enjoyed.
- Mitchell P. Conlon
Page 4
POLITICS...
(continued from page 1)
of the party in power, a president’s third year in office
is by far the best for stock market gains. Year two is the
worst.
What might account for these trends? Another election
cycle theory asserts that presidents tend to enact policies—which may not have popular support at first—
early in their term of office, with hopes that they’ll pay
dividends later on. Later in their term, when the next
election season looms, they tend to postpone making
difficult monetary decisions. This is certainly a cynical
view, but it’s plausible, especially considering how presidential influence on monetary policy has increased in
recent decades.
Yet another theory suggests that financial markets perform better under a divided government, since a bickering, divided Congress has less power to get things done,
allowing markets to run largely unencumbered. But the
data is ambiguous. One study shows that markets do
well when there’s a Democratic president and a Republican-controlled Congress, while another says a Republican-president/Democratic Congress combo makes for
terrible market performance.
Since we’re talking about data, we should note that
there isn’t a huge amount of it. After all, there have
only been 17 presidential elections since World War II.
There’s enough information for people to sift through
and identify compelling, if modest patterns, but the sample sizes are too small to make statistically-supported
conclusions.
That said, here is one statistical oddity that might interest you. Going back to 1928, there have been 14 instances (out of 22 presidential elections) where the S&P
500 has gained over the three months leading up to the
election. In 12 of those 14 instances, the incumbent
party has won the election. Use this nugget as you wish.
Or better yet, don’t. The bottom line here is that broad
economic factors—and the possible advent of large
events that “shock” the system—play a much larger
role in the performance of financial markets than party
leadership does. We’re certainly not saying that political leadership doesn’t matter—it just doesn’t offer
much help in predicting where financial markets
are headed.
Conlon Dart Happenings
Conlon Dart is pleased to announce
that Rick Bryan and Joe Boden have
been named partners at the firm.
“We are excited to have both Rick and Joe join
us as partners,” Stephen Dart says. “They add
knowledge and experience, but also bring a very
good energy to our team. The recognition is
well deserved.” Mitch Conlon adds, “Bringing in
Rick and Joe at the partner level gives us the
opportunity to think further down the road.
Our aim is to keep our growing team working
together for our clients long into the future.”
After a decade in the corporate retirement plan
business, Rick Bryan joined Conlon Dart in
2006 to support our growing financial planning
and investment research efforts. He quickly
completed his Certified Financial Planner
coursework, receiving the CFP designation in
2006. Rick’s responsibilities have increased
significantly over the years. Rick serves as lead
advisor for many of our established clients and
heads up our financial planning efforts, as well as
serving on the firm’s investment committee.
Joe Boden joined Conlon Dart in 2013 after
spending nearly two decades advising clients,
including many years on Fidelity’s private client
team. While at Fidelity, Joe accumulated a
wealth of investment and financial experience
working closely with individuals and families. Joe
proudly added the CFP designation to his list of
credentials in 2015.
Today, Joe serves as a lead advisor to longstanding clients and drives Conlon Dart’s investment research efforts.
Politics and markets make for interesting conversation,
but we advise you to stick to your financial plan: stay
diversified and remain pragmatic, even when your instincts tell you to focus on one side of the crystal ball.
- Mitchell P. Conlon
The information contained in this newsletter is for general use and while we believe all information to be reliable and accurate, it is important to remember individual
situations may be entirely different. Therefore, information should be relied upon only when coordinated with professional tax and finance advice. The publisher is not
engaged in rendering legal or accounting advice. Neither the information presented nor any opinion expressed constitutes a representation by us or a solicitation of the
purchase or sale of any securities. This newsletter is published by CONLON & DART LLC, SEATTLE, WA, COPYRIGHT 2016.
720 Olive Way, Suite 1850, Seattle, WA 98101 · Phone: 888-777-4015 · Fax: 206-728-1255 · Email: [email protected]