We are less than two months from the 59th presidential election on November 3. In addition to normal pre-election concerns, this year’s virus crisis election worries amplify existing concerns about the weak economy, a possible second wave of the corona virus this fall and the current all-time high market. In this month’s Investor’s Edge column, I hope to share with you a proper perspective on the presidential election’s impact on the economy and stock market.
Markets tend to be volatile ahead of elections, and October and November tend to be the wildest months of the year anyway, so with the two combined this year, wide swings in stock prices are near certain. When we throw in the wild card of the politics of politics, Election 2020 could impact the economy and stock market even more. The possibility of a contested election could wreak havoc in both the country’s economy and our financial markets, as Americans might then question the viability of our nation’s democratic process.
I want to start with the impact presidential elections have on the U.S. stock market in general. I hate to disappoint you, but for all the campaigning, polling, conventions, billions of dollars spent by the candidates, fretting, fighting, and rhetoric, for long-term investors, the presidential election doesn’t matter much. Markets have tended to power through presidential elections, though, not without some volatility along the way, regardless of whether a Democrat or Republican won the White House.
History and research proves this point. Market data since 1789 (using a mix of the S&P 500 & Dow Jones Industrial Average) shows, over a full 4-year term, there is virtually no return difference between Democrat or Republican president. It is a near tie: Democrat +8.6% vs. +8.8% for Republican presidencies. Keep that in mind as we approach November. Election years can be a tough time for investors to maintain a long-term perspective, given the strong emotions often induced by politics. The election/emotion meter could easily peak this election, perhaps the most in modern times — stoked by the combination of a deadly pandemic, a global economic weakness, widespread civil unrest and unprecedented market volatility. So, investors should keep emotions in check, and focus on the market’s fundamentals, their asset allocation, the economy’s condition and potential policy changes the election could bring. That leads to the impact potential policy changes could have on the U.S. economy. Tax policy, like in the last election, may be a big one with this year’s election outcome.
Researching which stocks moved and to what degree around the 2016 election, I found taxes had the most impact. This makes sense, as taxes directly affect corporate valuations and is the primary policy that is within control of political lawmakers. Simply, lower taxes increase earnings, which helps boost stock valuations. Other policies will impact the economy and specific sectors, such as energy and healthcare, but tax policy tends to carry the broadest market influence if 2016 is any guide. Consider a Joe Biden victory in November; and if the Senate flips Democratic. Mr. Biden wants to raise taxes. He may increase the top income-tax rate to 39.6% and raise the tax on dividends and capital gains to the same. Another “what if” Biden wins and tax policy, he is thought to raise the corporate tax rate to 28% from the current 21%. As I noted above, expect potential policy changes to also impact the economics of the healthcare and energy sectors. Trade and infrastructure policies put in place post-election will impact the macro economy, too. In many cases, such as healthcare policy, it matters more which party wins Congress than which man wins the White House. Because healthcare policy is largely driven by legislators, a change in who controls Congress could determine whether the new president’s healthcare vision becomes a reality. Congress plays a big role on trade, also. Trade policy will not only be impacted by who occupies the Oval Office, though wide-ranging trade powers are granted to the president. It also hinges on whether the Senate remains in Republican hands, as Congress has the authority to approve new trade deals.
In review, historically, the stock market has consistently delivered positive returns year-after-year whether we had a Democrat or Republican president. Therefore, the presidential election itself has not mattered much. What matters more is the control of Congress as important and economically impactful government policies can be reformed. On an additional noteworthy election fact relating to the stock market is the “Presidential Election Cycle Theory.” This was originally put forth by Yale Hirsch, creator of the Stock Trader’s Almanac. According to its research, the market has been positive overall in 19 of the last 23 election years (from 1928–2016), only showing negative returns four times. Year three of a president’s term is usually the strongest year for the market, followed by year four, then the second, and finally the first. So, there’s some more food for thought on the election and equities market.
May the best candidate win. May we soon have a COVID-19 vaccine. And may 2020 be a successful investment year for you. As usual, call me if you ever have a question. I am always happy to help.
