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How does the President affect the economy? Based on the data, it's hard to say.

The Coronavirus and resulting economic shutdown have dominated the news cycle this year. Now the uncertainty spotlight is shifting towards the upcoming election. With November 3rd fast approaching, we thought we would share some context for investors. 

In short, the stock market and political party control have shown very little correlation to one another historically, certainly not to the magnitude of investor trepidation that often precedes elections. Here are eight points to be mindful of heading into November and thereafter:   

The stock market has performed well under both Democratic and Republican leadership. 

From 1926 through 2019, the S&P 500 averaged 9.5% annualized returns under Republican presidents and 14.8% under Democratic presidents. Very often the successive market returns are more contingent on when a president takes over in the economic cycle, not necessarily their own economic policies. Either way, the market has mostly risen under both parties’ leadership.

 

No material difference in returns during election years vs. non-election years. 

While it may seem that election years should provide more volatility and potentially lower returns for the stock market given heightened levels of uncertainty, that has not been the case historically. As shown below, the average returns are marginally higher during election years (8.9%) vs. non-election years (8.1%) since 1860, with no real correlation to changes in party control. 

 

Volatility has NOT been higher, on average, in the months before and after election day. 

 It would be hard to convince someone that regardless of who wins in November that market volatility will not pick up around the election, that even seems probable to us with the potential for delays and skepticism from both sides caused by mail-in ballots. 

 Surprisingly, that has not been the case historically. If you went back in time, you would find plenty of issues for investors to fret about heading into an election, just as we have this year, but higher market volatility did not transpire in most cases. Since 1964, the S&P 500 had a 13.8% annualized volatility in the 100 days before and after the election vs. 15.7% annualized for the full period. 

 

A recession in the prior two years has been a bad signal for presidential re-election

The coronavirus was a black swan event, not a result of specific economic or monetary policies gone awry. Nevertheless, the U.S. is still coming out of a recession in the first half of this year caused by the forced economic shutdown. Historically, regardless of the catalyst, a recession in the 2 years before a re-election cycle has been a bad indicator for the incumbent president. We would also note that this sample size is still relatively small statistically speaking.

 

Markets do not care if you approve of the president or not.

Regardless of who wins, nearly half of the populace will be at least somewhat unhappy with the result and the successive presidential approval rating is unlikely to be very high. Historically, that has not mattered in terms of the market’s future returns. In fact, over 40% of the time since 1960 the presidential approval rating has been below average (between 36% and 50%), and during that time the market has averaged annual gains of 15.3%, the highest of the four approval rating ranges below.   

 

A divided government is usually better for stocks.

The House is widely expected to stay under democratic majority, while the Senate remains a toss-up. Regardless of who wins the presidential race, it may be best for both parties to hope for a divided government as it relates to their investments. Historically, a divided government (House/Senate/President) has resulted in higher returns than a unified government. The market appears to appreciate some checks and balances for preserving a bit of the status quo in government policy. 

 

  1. Dire predictions on presidential policy usually do not usually play out as expected.

 

You only need to look at recent history to see why fear regarding new presidential policies is often exaggerated. Courtesy of Hartford Funds3, here is a snapshot of what critics said about newly elected presidents and what transpired in terms of economic growth and stock market returns during their respective presidencies. In the long run, the economy and market will be fine no matter who gets elected. 

 

 

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 Investors often get skittish heading into an election and jump back in after. 

 Just as the incessant fear surrounding the coronavirus caused investors to flee stocks in March & April of this year, the negative undertones of political advertisements and debates often makes investors skittish during election years. Investor flows to money market funds (cash) are often the highest during the latter part of the presidential term as investors grapple with the uncertainty of potential change. Investors then pour money back into stocks in the inaugural year as uncertainty subsides, most often at higher prices. 

 This year, we have seen record outflows from stocks caused by fears from the economic shutdown. It is also evident that some investors are content to “sit on the sidelines” until after the election. The difficulty with that strategy, or any other market timing strategy, is that it is always much harder to decide when to get back in. There will always be something new to worry about, even after the election is decided. 

 

Conclusion

 Elections matter, just not as much as you might think for your investments. Stocks and political leadership have shown very little correlation at all over the long-term, and far less during election years than investors, news outlets, or politicians themselves choose to extrapolate. Stocks have a much higher connection to monetary policy, financial conditions, and underlying growth in Corporate America. Not even the most criticized or lackluster of politicians have been able to change that momentum thus far, and we do not expect that to change. 

Sources: 

  1. https://www.invesco.com/us-rest/contentdetail?contentId=5991eabf45272710VgnVCM1000006e36b50aRCRD
  2. https://www.foxbusiness.com/markets/stock-market-2020-election-impact-goldman-sachs
  3. https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/CCWP094.pdf
  4. https://www.capitalgroup.com/advisor/insights/articles/how-elections-move-markets-5-charts.html
  5. https://www.blackrock.com/us/financial-professionals/literature/investor-education/student-of-the-market.pdf
  6. https://advisors.vanguard.com/insights/article/electionsmatterbutnotsomuchtoclientsinvestments

 The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing.  Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future. 

Securities offered through Securities America, Member FINRA & SIPC. Advisory services offered through WealthPLAN Partners, a Registered Investment Advisor. Securities America and its representatives do not provide tax or legal advice; therefore it is important to coordinate with your tax or legal advisor regarding your specific situation. WealthPLAN Partners and Welch Financial Planning, LLC are separate entities from Securities America.