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With the midterm elections behind us and more divisive politicking ahead of us, it looks like nothing's changed in terms of Republicans and Democrats fighting like, well, bulls and bears.
Only this time, it's different.
Not only are politics going to rip apart the country, perhaps like few other times in America's history, but also bad blood boiling over into hatred will turn Americans (and bulls and bears) into raging lunatics.
The sad truth is that this time is different, for a lot of reasons. And that's the danger for investors.
What's not different is the expectation investors have that divided government is good for the market.
That expectation is backed up by some impressive statistics.
According to Barron's, calculations done by LPL Financial's Chief Investment Strategist John Lynch and Equity Strategist Jeffery Buchbinder say that, "The combination of a Republican president and a split Congress resulted in an average annual return of 15.7% for the S&P 500 since 1950." And a "Democratic president and a GOP Congress produced an 18.3% annual return." Randall Forsyth of Barron's says this "supports the conventional wisdom that Wall Street likes gridlock."
But that's not the whole story.
Here's why this time is different, and how you'll have to manage your money differently in this not-so-brave new world…
The New Benchmark
Over any rolling five-, 10-, or 50-year period, the S&P 500, the Dow Jones, the Nasdaq, or any benchmark will probably show annualized gains. That doesn't mean we're not going to have panic sell-offs, corrections, bear markets, or financial meltdowns though.
Volatility is the new benchmark.
The underlying reason volatility is increasing in markets and across individual stocks – even staid stocks that aren't typically prone to wild swings – is that the mechanics of how stocks trade are different. The mechanics of how markets trade are different.
Yes, these times are different.
Stocks don't trade at a single exchange or venue anymore. Orders to buy and sell shares are spread out over 13 U.S.-registered exchanges and about 40 SEC-registered "dark pools."
Decimalization, stocks' SEC-mandated ability to trade in increments of a penny, changed the incentives specialists and market makers had to add liquidity by buying and selling millions of shares of stocks for their own accounts, "to maintain fair and orderly markets."
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There are fewer profit-making opportunities if specialists and market makers take outsized risks to make a penny a share, as opposed to taking risks in their own accounts to make "an eighth" (an eighth of a dollar, or 12.5 cents) or $0.25 a share before decimalization. They're not there anymore.
That liquidity spigot is closed.
The New World
Into the void, where investors don't leave large standing orders down to sell, and more importantly, to buy shares at levels below where they're trading. Investors used to be willing to stand in line to buy shares at lower prices, and traditional liquidity providers aren't acting as intermediaries to maintain "fair and orderly" markets. High-frequency trading and algorithm-driven buying and selling have taken over.
Those mechanics, for individual stocks and markets, manifest themselves in the frightening form of flash crashes and wildly swinging stocks and markets.
How else could the Dow, a market benchmark currently around 25,600, trade up 500 points in less than five minutes, or possibly five seconds, and then fall 1,000 points five seconds later?
It's about the mechanics.
Now, on top of that frightening reality – which no one talks about because it's too scary to let the public know what the SEC's allowed to happen to U.S. capital markets – we're layering on partisan politics that are going to make years of frontal assaults and backstabbing look like a day at the beach.
And this is happening as the bull market's looking long in the tooth, the tech-darling FAANG stocks are rolling over, and peak earnings talk has replaced optimism that companies can keep earning more. And that's not all – peak profit margins, trade wars, hacking and voter fraud, and immigration insanity are also talking points moving markets.
Enjoy the afterglow investors expect from the market when a divided Congress leads them to believe steady gains are our future – because that's going to be a short-lived fantasy.
And things are about to get much worse.
About the Author
Shah Gilani is the Event Trading Specialist for Money Map Press. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains.Shah is also the proud founding editor of The Money Zone, where after eight years of development and 11 years of backtesting he has found the edge over stocks, giving his members the opportunity to rake in potential double, triple, or even quadruple-digit profits weekly with just a few quick steps. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.