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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 boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.