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Past is prologue? Why one trader sees a post-election recession on the horizon

Despite all the uncertainty and rancor surrounding November's U.S. presidential election, one thing is clear: Past trends indicate that the economy could be facing a recession — and could drag the market down with it.

So believes Sven Henrich of NorthmanTrader.com, who crunched the historical figures that suggest, regardless of who becomes the next president, the markets could be in trouble. According to Henrich's analysis, data show that since 1960, 70 percent of new presidents face an economic downturn very early in their first term.

"Historically, that's not good for markets, as they correct between 13 to 40 percent during a recession," Henrich said last week on CNBC's "Futures Now."


Henrich contended that much of the trend could have to do with consumers' uncertainty during transitions between presidents, but he also believes that the coming election differs from those of the past. This, in turn, doesn't bode well for markets, and may heighten the chance of an economic slump.

"In this particular cycle, we're seeing something that we've never seen before in any U.S. election, and that is neither candidate, whether it's Hillary Clinton or Donald Trump, have a majority support within the population," said Henrich. "So no matter who wins, in January Americans are faced with a president that the majority doesn't support."

The latest NBC/Wall Street Journal poll showed that the lead by Democratic presidential candidate Clinton over Republican nominee Trump was narrowing, this ahead of Monday's first presidential debate.

"I have no idea how this is reflected in consumer confidence, but it doesn't seem to suggest that consumers will be very confident with their new president," he added.

A 20-25 percent correction?

Traders work on the floor of the New York Stock Exchange
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Traders work on the floor of the New York Stock Exchange

Henrich isn't the only one worried about a downturn. Last week, analysts at Lombard Street Research pointed to the lack of clarity surrounding the Federal Reserve's policy intentions as feeding an asset bubble that was on the verge of bursting. Branding the central bank's refusal to hike rates a "costly failure," the firm predicted that a 2017 bear market was all but certain as stocks become increasingly vulnerable to higher rates.

For his part, Henrich isn't too optimistic about the markets as a whole in general.

While the major indexes continue to trade near record highs, stocks haven't been performing the way many might expect. Looking at the Value Line Geometric Index, which tracks stocks on a relative equal-weight basis instead of by market capitalization, Henrich believes that market performance and stock performance aren't actually adding up.

"Here we see that despite the S&P and the Nasdaq making new highs, the larger markets or stocks overall are not making new highs at all," said Henrich. "That's a negative divergence, and that looks very similar to the pattern that we saw in 2000," he said, citing the year when the tech bubble burst definitively.


Should a recession occur, Henrich says investors should expect the market to drop by as much as 20 to 25 percent from current levels. In other words, Henrich thinks the S&P 500 could plunge to as low as 1,630 or so.

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