Leap Years, The Economy, Stocks & Politics
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. Leap Years – Why We Have Them
2. But Wait, It's Not Quite That Simple
3. What If You Are Born On Leap Day?
4. Stocks In Presidential Election Years
5. The Economy: Are We In A Recession Or Not?
2008 is a “Leap Year” in which the month of February has an extra day – February 29 – and this year will last 366 days instead of the usual 365 days. February 29, 2008 is this Friday. Leap Years typically occur every four years, but not always, as I will explain below.
Most of us remember generally why we have Leap Years, but we probably do not remember the “Gregorian Calendar” and why we have Leap Days only in certain years. So in the spirit of writing about whatever is on my mind, I thought I would remind us all why we have Leap Years and why they are necessary, but also why they are not altogether perfect.
We will also look at some interesting statistics on the stock market during Leap Years, which are also usually presidential election years. Historically, the stock markets go up rather significantly in presidential election years. But will it happen this year? I wouldn’t bet on it. The major US stock markets remain in a funk, down some 10-15% or more since their peak last October.
Following that, we will take a brief look at the status of the US economy. While the mainstream media and Hillary and Obama would have us all believe we are already in a serious recession, the data simply does not back up such claims. Yes, we may be headed into a recession, but we may not. Fed Chairman Ben Bernanke believes we will see slow growth just ahead, but no recession, followed by a rebound in the second half of this year. Let’s talk about it.
Finally, the Democratic presidential race, at least at this point, is tipping toward Barack Obama, and the polls now indicate that Obama would defeat Republican John McCain in the general election. Obama has become a political icon, drawing rock star size crowds all across the country. But do his followers really know what his policies are? I doubt it. This week, we will take a close look at where Mr. Obama stands and votes (or does not vote) on the issues.
That’s a lot on our plate this week, so let’s get started.
Leap Years – Why We Have Them
2008 is a leap year, which means that it has 366 days instead of the usual 365 days that an ordinary year has. An extra day is added in a leap year - February 29 - which is called an “intercalary day” or a “leap day.” What follows is a summary of a piece entitled “Leap Year 101” that I found at www.infoplease.com on why we have leap years.
You probably know this, but leap years are added to the calendar to keep it working properly. The 365 days of the annual calendar are meant to match up with the solar year. A solar year is the time it takes the Earth to complete its orbit around the Sun - about one year. But the actual time it takes for the Earth to travel around the Sun is in fact a little longer than that - about 365¼ days (365 days, 5 hours, 48 minutes, and 46 seconds, to be precise). So the calendar and the solar year don’t exactly match; the calendar year is a touch shorter than the solar year.
It may not seem like much of a difference, but after a few years those extra quarter days in the solar year begin to add up. After four years, for example, the four extra quarter days would make the calendar fall behind the solar year by about a day. Over the course of a century, the difference between the solar year and the calendar year would become 25 days. In this example, instead of summer beginning in June, it wouldn’t start until nearly a month later, in July. So every four years a leap day is added to the calendar to allow it to catch up to the solar year.
FYI, the Egyptians were the first to come up with the idea of adding a leap day once every four years to keep the calendar in sync with the solar year. Later, the Romans adopted this solution for their calendar, and they became the first to designate February 29 as the leap day.
But Wait, It's Not Quite that Simple
Since the solar year is apprx. 365¼ days long, the math seems to work out just fine by adding an extra day to the calendar every four years to compensate for the extra quarter of a day in the solar year - but not exactly. This is because the exact length of a solar year is actually 11 minutes and 14 seconds less than 365¼ days.
That means that even if you add a leap day every four years, the calendar would still overshoot the solar year by a little bit - 11 minutes and 14 seconds per year. These minutes and seconds really start to add up over long periods of time: each 128 years, for example, the calendar would gain an entire extra day. So, the leap year rule, “add a leap year every four years” was a good rule, but not good enough.
To rectify the situation, the creators of our calendar (the Gregorian calendar, introduced in 1582, see link below) decided to omit leap years three times every four hundred years. This would shorten the calendar every so often and rid it of the annual excess of 11 minutes and 14 seconds.
So in addition to the rule that a leap year occurs every four years, a new rule was added: a “century year” is not a leap year unless it is evenly divisible by 400. Thus 1700, 1800, and 1900 were not leap years, but 1600, 2000, and 2400 are leap years. This rule manages to eliminate three leap years every few hundred years.
This ingenious correction worked beautifully in bringing the calendar year and the solar year into harmony, pretty much eliminating those pesky extra 11 minutes and 14 seconds. Now the calendar year and the solar year are just about a half a minute off. At that rate, it takes 3,300 years for the calendar year and the solar year to diverge by a day.
What If You Are Born On Leap Day?
For those fortunate, or unfortunate, people who were born on February 29, there are some interesting challenges as you might imagine. But first, what are the odds of being born on February 29? According to the experts, the odds of being born on February 29 are about 1 in 1500 worldwide. These same experts estimate that there are about 185,000-200,000 people now alive in the US who were born on Leap Day, and apprx. four million worldwide.
For those who were born on February 29, this means that you have a legitimate birthday only once every four years (or less). Isn’t that interesting? And it has led to many leap day slogans over the years, such as leap day babies tend to live four times as long as the rest of us, which of course is not true. There is even a Society of Leap Day born folks. Typically, those born on February 29 celebrate their yearly birthdays on either February 28 or March 1 in non-leap years.
In the modern day world of computers and the Internet, those born on leap day face many unusual challenges. Most specifically, many software programs do not accept February 29 as a legitimate calendar date. As you can imagine, this leap day birthdate phenomenon has even more far-reaching implications. Since the February 29 leap day is not immediately recognized in many software programs, it can also cause problems in receiving one’s Social Security benefits, insurance settlements, various calendar-based payments, etc., etc.
Well enough for being born on leap day, but the implications for those born on February 29 are interesting. And there are even leap day implications for the rest of us not born on February 29, especially for investors.
Stocks In Presidential Election Years
As you well know, presidential elections occur once every four years, on even years (ie – 2000, 2004, 2008, etc.) Most presidential election years also occur on leap years, but not always. The stock markets as measured by the S&P 500 Index have tended to do very well in presidential election years. In fact, the S&P 500 has advanced in 13 of the last 14 presidential election years, according to Stock Trader’s Almanac. In the 20 presidential election years since 1926, the S&P 500 was up 14.9% on average, versus 11.3% during non-election years. In the 15 presidential elections since 1948, the S&P 500 gained an average of 13.1%.
Interestingly, the stock market historically has done better as presidential elections drew closer. On average, apprx. 80% of presidential election year gains in stocks came in the last six months of the year. I can find few convincing arguments for why this occurs prior to presidential elections, but I would suggest it is sometimes an indication of how the electorate simply feels better about getting rid of the existing administration, for better or worse.
In any event, here’s an interesting tidbit. This year we have a rare occurrence in that the sitting president is not eligible for re-election, a “lame duck” status that has only happened three times during the last 60 years. Neither President Bush nor Vice-President Dick Cheney will be on the ballot this November. During these rare lame duck presidential election years, the S&P 500 delivered sub-par returns of only 2.7%, while bonds returned a strong 11.1%, on average.
Then there is always the question of whether the equity markets do better if Republicans win the White House versus the Democrats. Many have the notion that the equity markets do better when the Republicans win elections; however, the data does not bear this out. According to researchers at Ibbotson Associates, since 1948, the average S&P 500 return in presidential election years was 13.1%. In the election years when the Republican won, returns averaged 11.4% versus 15.4% in years when the Democrat won.
In the case of the post-election years since 1948, the nine Republicans suffered through under-performing stock markets with the S&P 500 return averaging only 1.9%, as compared to the six Democrats who saw average returns of 15.7% in their first year in office. George W. Bush came to office just as the tech bubble was bursting and a recession was unfolding. Likewise, Ronald Reagan inherited a recession.
It will be most interesting to see if the equity markets honor their historical upward norm in election years this time around, or whether 2008 will be an exception to the longstanding trend, and stocks will be lower on the year. As this is written, the S&P 500 is down apprx. 8.5% for the year and is down apprx. 13% from the peak last October. Most analysts I read agree that the trend is down and that stocks are likely to go even lower before we see a meaningful turnaround.
If I were a betting man, I would have to wager that stocks in 2008 will defy the historical odds and end the year lower, but I would not bet much. No one knows if there will be a late year rally with stocks ending the year, as has happened so often in the past during presidential election years, on a positive note. As noted above, the S&P 500 is only down apprx. 8.5% for the year. So we’ll see.
Whatever turns out to be the case, there is widespread agreement that the movements in stock prices are a pretty good indicator of the trend in the economy. With that in mind, let’s take a quick look at the latest economic reports.
The Economy: Are We In A Recession Or Not?
As you well know, there are widespread reports that the US economy is already in a recession. But as I have reported frequently in recent months, the definition of a recession is two or more consecutive quarters of negative growth in GDP. As much as the Democrats would like us to believe otherwise, we are not officially in a recession yet.
The US economy is slowing down, no doubt. Admittedly, we may look back in a few months and be able to confirm that a recession started in the 1Q of 2008, but we have not had two back-to-back negative quarters of GDP thus far. What we do know is (subject to any subsequent GDP revisions) that the 4Q of 2007 was a positive quarter of economic growth, but just barely.
And what about the 1Q of 2008? We don’t know a lot just yet. Several economic reports for January are yet to be released. And we will not know if the 1Q saw negative economic growth until we see the advance GDP report in late April. So what is our best indicator in the meantime? I would suggest it is the monthly Index of Leading Economic Indicators (LEI), which fell again in January.
The LEI was down 0.1% in January according to the Commerce Department. While a decline of –0.1 is not particularly indicative, the January number was the fourth consecutive monthly decline in the LEI. The LEI has been negative in five of the last six months, which is indicative of an economy that is slowing down rapidly, and could mean there is a recession impending.
We all know that consumer spending makes up apprx. 70% of GDP. So if consumer spending drops off sharply, then a recession is more or less inevitable. And consumer spending is considered to be a direct variable of consumer confidence, which according to all reports is dropping significantly.
The latest University of Michigan Consumer Sentiment Index plunged from 90.6 in December to 69.6 in January, one of the largest monthly drops in that index ever. The Conference Board’s Consumer Confidence Index fell from 90.6 in December to 87.9 in January. Just this morning, the Conference Board report that the Consumer Confidence Index plunged from a revised 87.3 in January to 75.0. This is a huge one-month drop! The reading was the lowest since the index registered 64.8 in February 2003, just before the US invaded Iraq, and was far below the pre-report consensus of 83.0.
In light of these latest reports for February, there is no question that consumer confidence is falling sharply. But the question is why. Is consumer confidence falling, as so often in the past, due to labor market weakness and job losses? Not to any great degree – unemployment at 4.9% is historically quite low. Or might it be due to the housing slump/credit crisis? No doubt, in large part. Or might it be due to the current political malaise? I suggest it is largely due to a combination of the housing slump/credit crisis and the election year political malaise.
But first, what do we see in other economic reports of late? One would think with the widespread predictions for a recession that the economic reports for January would have been very bleak. Even I, your normally optimistic analyst, have admitted that the US economy may be rolling over to the downside. But the economic reports of late simply do not bear that out. Let’s take a look.
Most surprising, retail sales actually rose 0.3% in January, despite a pre-report consensus for a decline of 0.3%. Spending bounced back after a disappointing holiday shopping season. The ISM index of manufacturing rose to 50.7 in January from 48.4 in December. Industrial production rose a modest 0.1%, but at least it was positive. And the unemployment rate fell from 5.0% in December to 4.9% last month.
Other than the LEI, the data above do not support the view that we are already in a recession. Of course, there are still numerous economic reports for January to be released over the next couple of weeks, which may provide more clarity. But for now, the main negative influence on the economy is the housing slump where the numbers continue to worsen.
In a speech two weeks ago, Fed chairman Ben Bernanke predicted that we would see very slow growth in the first half of this year, but most likely dodge a recession, with growth to rebound in the second half of the year. I would have to say that his latest forecast is quite optimistic. Bernanke has also made it clear that the Fed stands ready to cut interest rates even more in the weeks and months ahead. The next regularly scheduled FOMC meeting is March 18.
Politics: Be Careful What You Wish For
As noted earlier, the race for the Democratic presidential nomination appears to be swinging toward Barack Obama. Most political analysts believe that Hillary Clinton must win both Ohio and Texas next Tuesday in order to stay in the race, plus win Pennsylvania on April 22 to have any shot at beating Obama. She is ahead in the polls in Ohio and Pennsylvania, but Obama is closing the gap. In Texas, Hillary is now only leading Obama by the margin of error.
Most of my conservative friends passionately hope that Obama defeats Hillary for the nomination. They do not seem to care that John McCain probably stands a much better chance of beating Hillary than Obama in the general election. They don’t care - they just want the Clintons to go away.
Interestingly, some of my conservative friends and business associates – who are Republicans – want Hillary gone so badly that they are going to vote for Obama in the Texas primary next Tuesday. Say what!? In Texas, voters can choose to vote in either the Republican primary or the Democratic primary. Several Republicans I know feel that, since McCain has the nomination virtually wrapped-up, they can hasten Hillary’s defeat by voting for Obama next Tuesday.
One of the biggest raps against Obama is that while he is long on hope and promises of change, he is deftly short on policy positions and specifics as to what those changes might be. Some Obama supporters suggest that because he has been a senator for less than three years, he hasn’t had time to build a policy record. But that simply is not true!
In fact, in Obama’s short time in Washington, he has done something few thought was possible: compile a voting record even more liberal than Ted Kennedy and become the most liberal member of the Senate. According to National Journal, Obama’s votes in 2007 hurled him into the top spot as the #1 most liberal member of the Senate.
National Journal found that in 2007 Obama favored the liberal position on 65 of 66 key votes in which he voted, giving him a 95.5 score, the highest in the Senate.
Earlier this month, Investors Business Daily had a great summary of Obama’s Senate voting record. Here is the summary as it appeared on www.IBDeditorials.com on February 15:
“On the issue of Iraq, he opposed the surge that has brought us victory. On March 15, he voted in favor of limiting debate on a proposal expressing the sense of Congress opposing President Bush’s troop surge designed by Gen. David Petraeus.
Obama, whose foreign policy includes talking to our enemies while invading our allies, recently told the assembled veterans at the VFW Convention in Kansas City, Mo. ‘All our top military commanders recognize that there is no military solution in Iraq.’
Let’s see him repeat that to John McCain in a debate. Recently a top al-Qaida leader said his side faces an ‘extraordinary crisis’ and ‘panic, fear and the unwillingness to fight.’
On March 29, Obama voted for a fiscal 2007 emergency supplemental appropriations bill that included a goal for withdrawing most U.S. troops from Iraq by 2008. On Sept. 21, he was one of only 28 senators voting to set a timeline for most U.S. troops to withdraw from Iraq within 90 days.
On the issue of fighting terror, on Aug. 3 Obama voted no on renewing for six months the authority under the Foreign Intelligence Surveillance Act to review communications of suspected terrorists without a court order.
Obama loves taxes and has proposed eliminating the earnings cap on Social Security taxes. This would hit two-income couples and small-business people who file as individuals hard.
On March 30, he voted to raise the cigarette tax by 61 cents a pack and use the extra revenue to expand the State Children’s Health Insurance Program to include people earning four times the poverty level, adults and illegal aliens.
Despite America’s energy woes, on June 13 he voted against speeding up the permitting process for oil-refining sites. On June 21, he voted to ‘limit debate’ (invoking cloture to bar a filibuster) on an energy bill requiring higher fuel economy standards for all vehicles.
This bill produces no new domestic energy, but it would force Americans into smaller, less safe and more expensive cars. The bill also requires utilities to use renewable energy sources (not including nuclear power) for 15% of their electricity by 2020.
On the issue of stem cell research, he voted on April 11 against supporting nonembryonic stem cell research and in favor of embryonic stem cell research. This despite discoveries by researchers worldwide of ways to ‘reprogram’ skin cells, for example, to become and potentially provide a limitless supply of embryonic stem cells without destroying human embryos in the process.
On June 6, he voted against making English the official language of the U.S. On May 24, he voted against permitting law enforcement officers to question individuals about their immigration status if they have probable cause to believe that the individuals are here illegally.
His liberal score may have been even higher were it not for the votes he missed. On Sept. 26, he missed a vote expressing the sense of the Senate that the Iranian Revolutionary Guard should be designated a terrorist organization. He says he would have voted no.
Obama's voting record makes George McGovern look like a moderate. The GOP scored against John Kerry in 2004 by pointing out his top National Journal liberal ranking for 2003.
If this presidential thing doesn’t work out, Obama might consider joining the NASCAR circuit. It’s the only occupation we can think of where you win by turning faster to the left than anybody else.” That’s a cute zinger, IBD. Too bad it’s true!
As you can see, Obama is about as liberal as you can get. He is definitely to the left of Hillary. Some political observers believe that because of Obama’s ultra-liberal positions, John McCain should be able to beat him in the general election by hammering on his voting record. This is also the thinking among my conservative friends and associates that are planning to vote for Obama in the Texas primary, in an effort to get rid of Hillary once and for all.
But I must tell you that I don’t think it will be that easy for McCain to beat Obama in November. If Obama wins the nomination, he will have tremendous momentum. While McCain will almost certainly go after Obama’s ultra-liberal voting record, Obama will definitely make the argument (passionately as he always does), that McCain represents the status-quo, whereas Obama is about the future. In fact, he already has. In the last two weeks, Obama has been saying that John McCain represents “four more years of George W. Bush.”
Imagine the visuals of the McCain/Obama debates later this year: McCain - 71 years old and 24 years in Congress (status-quo) versus Obama – 46 years old and the first minority ever to have won the Democratic nomination for president (fresh, new, change). Add to that the fact that McCain is not a particularly good or energizing speaker versus Obama who is a fantastic, charismatic speaker who has energized millions of young Americans to get into the voting process. I very much hope I am wrong, but I could see a McCain/Obama presidential race turning out much like Bob Dole/Bill Clinton in 1996, when Dole was trounced.
For the record, I would much rather see a McCain versus Hillary presidential race later this year. Hillary has very high “negatives” as many Americans don’t want the Clintons back in the White House. While McCain is not as conservative as many on the right would like, he is a war hero and is strong on the military, homeland security and some other core conservative issues. I will vote for McCain in the general election, regardless whether it is Hillary or Obama on the Democratic ticket.
Finally, listen up all you Ron Paul supporters that are among my E-Letter audience. As should be obvious from the previous four paragraphs, I will not be among my conservative friends that will be voting for Obama in the Texas primary next Tuesday, hoping to get rid of Hillary. And I will not be voting for John McCain either.
For the record, I will vote for Ron Paul in the Texas primary. Ron Paul doesn’t have any chance of being the GOP nominee, but I will vote for him in the Texas primary because I want to see Ron Paul keep up his fight in Congress, and maybe run again next time. Are you Ron Paul supporters happy with me now?
That is all for this week. As always, thanks for reading. Special thanks to all of you who send me comments (positive or negative) and suggestions. Writing 7-8 pages of (hopefully) interesting and helpful commentaries week in and week out is a daunting challenge, and one that takes a great deal of time each week. So it is always an encouragement to hear from you.
Thanks also to Mike Posey, my Senior Vice President, who helps me run our business and increasingly helps with the weekly E-Letter, including his own retirement columns from time to time, and my staff that is very involved with editing, proofing, distribution, etc.
Gary D. Halbert
Curious History of the Gregorian Calendar
Obama surges way ahead of Hillary nationally.
Is it over for Hillary Clinton?
Six Things We Don’t Know for 2008
Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.