Presidential “Pop”

Wow.

An upset worthy of hyperbole: Donald Trump will be our next president.

Almost immediately, the markets started reacting.  US Futures dropped like a rock.  Foreign markets dropped for real and then rebounded.  Now, almost a week later, lots of folks are starting to interpret what a Trump presidency means.  I wondered what typically happens shortly after an election.  Let’s just stick with the S&P 500 and look at how it closed on November 1 (before an election) vs. December 1 (after an election).  Maybe we can see how panicked or calm we should be…

Here’s a table showing the 1 month closing values and the % changes since 1900.  If you’re wondering why that particular window, it covers a pretty significant span of US history and a range of tumultuous to halcyon periods.  By the way, the S&P Data is from here.   Special thanks to Robert Shiller for making it freely available.  And, the Electoral College data is from here.

One month S & P 500 changes since 1900.

One month S & P 500 changes since 1900.

 

For all years since 1900 without a presidential election, the average one month change was a positive increase of 0.5% (standard deviation of 0035).  For all election years in the same period, the one month change was a 0.3% increase (standard deviation of 0033).  Here’s a histogram to help visualize things.  See the overlap?  The stats seem to suggest that for this time window, there’s no net benefit to either jumping into or out of the stock market in response to election results.

preselectionyrs-vs-non

 

But, wait a minute.  Aren’t Republican presidential candidates better for business and the stock market?  In the days since The Donald was elected, the US stock market hit record highs.   See!  Well, let’s look at the data.  For all election years in our data set, we can split the one month returns by the winning party.  When Republicans win the White House or Democrats win the White House, there is no difference compared to non election years.

So, forget about non election years: let’s pit Democrats against Republicans directly.  Since 1900, there have been 15 Republican presidential terms and 14 Democratic ones.  Here’s the histogram of the one month change in the S & P 500.  Visually, it looks like there might be something there: a couple more high returning years in red vs. blue.  Again, the stats don’t show any meaningful difference between the two parties.

reps-vs-dems

 

So, what’s the take-away?  Warren Buffet’s sentiment: “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.”  Despite all the rhetoric, punditry, and discord, America is a great nation to belong to. 

sandp-over-time

Regardless of your political affiliations, invest.  Invest for the long haul.  Plant that seedling as soon as you can.  It will grow into your own money tree.

Investing With Leverage: Whose Money Is It Anyway?

As the year starts to wind down, I spent some time reviewing our financial books for the condo.  I was adding up the income earned to date, paying required expenses, and thinking about what distributions we should take.  Then, it struck me: Once rental payments started coming in, we haven’t spent any more of “our” money.  Effectively, our tenants have been paying our mortgage, covering condo fees, and building our maintenance reserves.

So, let’s explore how much of our actual cash we’ve spent. I’ll use some rounded numbers to help illustrate this.  We spent about $65k to acquire the condo and get it rented.  Now, that includes all of our closing costs and renovations as well as our initial equity.  Npw, let’s break things down a bit further:

  • Down payment ~40k
  • Closing costs ~10k
  • Renovation costs ~15k

The down payment is not really gone assuming we sell at some point.  It’s counted as part of our initial equity in the property. But that cash is currently tied up, and we cannot use it for any other purpose (More to come on that). If the condo appreciates at all (we sell it for more than we bought it), that will be considered an increase in our equity also known as a capital gain.

The 10k in closing costs are essentially gone.  The allowed ones went into our business expenses and will be helping us to offset current and some future income.  So, these were “real” expenses to us.

We also spent about 15 k to renovate.the unit. You could argue that we had to spend real money to pay for countertops, appliances, and a new HVAC system.  Or, you could consider them as increases in the base value of the property.  Where applicable, that’s what we dis.  The big items were counted as increases in our cost basis, and they are being depreciated over their IRS directed lifetimes. So, an accountant might say the money is not technically gone.

That means we bought an income generating asset that meets the 1% rule.  And we did it for a total of 10k of real expenses.

Baring any major disasters requiring cash above our reserves, every other nickel  from fixing the garbage disposal to putting in new floors (again), will be paid for with other peoples’ money .  Now that’s exciting!

So, we have this great problem…what do we do with the excess cash once we’ve fully funded our reserves?  Pay down the mortgage?  Save for rental property number two?  Invest in Wells Fargo?