We are making our way into the homestretch of the 2020 presidential election season. With an ongoing pandemic, social unrest, and two polarizing candidates, the market can certainly be unsettling. At times, the fate of the world seems to hang in a delicate balance. But when it comes to your investment portfolio, do U.S. presidential elections really matter?
We set out to answer this question in this post and hope to share some additional insights and takeaways going forward.
Since the late 1920s, there have been 23 presidential elections. Several occurred at extraordinary times, such as after the Great Depression; during WWII (1940-1944); and, closer to the present, at the onset of the dot com bust in 2000 and the global financial crisis in 2008. This means that stock market returns around the time of those elections were likely impacted largely by these historic events rather than by the results of the elections.
Normally, incumbent candidates have a high likelihood of getting re-elected. In fact, incumbents have won re-election 65% of the time since the Civil War.1 Unsurprisingly, in all instances in which the incumbent lost, there was a recession or depression during their term.
The chart below from Alger illustrates this fact. A recession in the preceding two years has historically indicated a change in the Oval Office.
Source: Alger; 2020 U.S. Presidential Election Handbook
At the start of the year, economic growth was slowing but solid and unemployment was at a 50-year low. Presently, the U.S. economy is experiencing the deepest recession since World War II, with unemployment still widely elevated and an exploding deficit. In light of an economic recession combined with a public health crisis, former Vice President Joe Biden has been gaining popularity while President Trump’s approval ratings have slid.
According to PredictIt, an online prediction market that offers prediction exchanges on political and financial events, Joe Biden has a sizeable lead. However, in 2016, the vast majority of political commentators and news outlets predicted a high probability of a Clinton victory, and we all know how that played out.
The number of cases and hospitalizations are on the rise again, which will undoubtedly impact the way Americans vote. Whether a vote is cast by mail box, drop box, or by ballot box, it is clear that it will take longer to count the votes this time around due to the large number of people requesting mail-in ballots. It could very well be that, as the sun rises on November 4th, no victor has been declared. Nevertheless, the odds still strongly favor the election producing a clear winner within a few days.
In the case of a contested election, many investors wonder what this could mean for the markets. The most recent example of this was in 2000 (Bush vs. Gore), when the S&P 500 Index fell over 10% shortly after the election. Digging deeper paints a different picture though. In the year of 2000, the market peaked in March and had already fallen 6.3% from its high on Election Day. While the uncertainty surrounding the outcome of election caused lower consumer confidence and corporate spending, the true culprit for the market drawdown was the dot com bust.
Time and time again market pundits and investors predict the demise of the market due to an opposing candidate. But, what history shows us is that the long-term trend of the stock market and economic growth has been up and to the right no matter who the President is.
When Obama got elected, an op-ed was written on March 6, 2009 in the Wall Street Journal titled, “Obama’s Radicalism is Killing the Dow.”2 One day after this op-ed was written the S&P 500 bottomed, and would go on to make nearly 130 new all-time highs.
When Trump got elected, Dallas Mavericks owner, Mark Cuban, went on record saying, “In the event Trump wins, I have no doubt in my mind the market tanks.”3 There have been more than 130 new all-time highs for the S&P 500 during Trump’s term.
Source: awealthofcommonsense.com; “Don’t Mix Your Politics with Your Portfolio” Past performance is not a guarantee of future results. Indices are not available for direct investment, therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Source S&P data 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
We mistakenly correlate past and future returns of the market based on our political beliefs, but the chart above shows us that stocks have continued higher regardless of presidential party. In fact, since 1932, only one president has had a negative return during their entire presidency.
Democratic nominee Joe Biden is calling for corporate taxes to be raised from 21% to 28%, taxes on individuals making over $400,000 to rise, and raising capital gains taxes for those earning more than $1 million. Conventional wisdom is that Republicans are good for markets due to their pro-business nature and lower taxes while Democrats are bad for markets because they favor more regulation and government spending, which can hinder economic growth. In theory this makes intuitive sense, however, the stock market returns of the past do not reflect this belief.
The president has an extraordinary amount of influence on domestic and foreign policy, as well as on the national mood. At the same time, the president’s ability to pass legislation on taxes, revenues, regulations, and international policy is contingent on the make-up of Congress. This is not to say that a president cannot influence economic policy, but the impact they have on markets may not be as much as people think.
We believe the occurrence and timing of many exogenous events that happen during a president’s term have a larger impact on the direction and ultimate outcome of the markets and for the most part, out of the hands of the President. For example, the Clinton presidency started right as the internet and other technological advancements were taking off. George W. Bush had to deal with the dot com bubble bursting followed by the September 11th terrorist attacks right off the bat. And more recently, Barack Obama had the benefit of entering the office after one of the largest stock market drawdowns in history as the Global Financial Crisis was ending.4
Tying it all together.
Human nature can often get the better of us by placing a lot of emphasis on a specific event (such as an election), rather than zooming out and looking at the bigger picture; underneath the surface may lie copious amounts of detail truly driving the results.
You may be hearing or continue to hear doomsday/overly zealous predictions pertaining to a certain outcome this election season. Market commentators and social media influencers DO NOT KNOW your story and aspirations, and they HAVE NOT taken the time to understand your willingness to take risk, your ability to take risk, and your need to take risk. While these predictions are good for clicks, they may not move you closer toward your goals.
This is a time where emotions can get the best of us. Please reach out if you have any concerns regarding how the election might impact your investment plan or if you need any other questions answered. At Nova R Wealth we are here for you. Lean on us.
1 JPMorgan; US Presidential Election – Our Latest Insights
2 Wall Street Journal; Michael J. Boskin; https://www.wsj.com/articles/SB123629969453946717
3 Alliance Bernstein; 2020 Election: Politics Don’t Matter?
4 Carnegie Investment Counsel; Do presidential elections really impact the markets as much as we think?
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