We have written a lot about COVID-19 and its impact on the markets and the economy. We wanted to take a break from that and focus on an issue that will come to the forefront in the next few months, the Presidential Election. Many of the most recent polls show Joe Biden has a lead over President Trump both nationally and in most swing states. Most of us remember the polls being wrong from the last election showing that President Trump would lose the election. The election is still several months away and as 2020 has shown us in more ways than we would like, a lot can happen in a few months. We are not here to make a prediction on what is going to happen one way or another.
Depending on which side of the aisle you sit on, you probably have strong feelings on what you think the outcome of the election will mean for the economy and the stock market. How you feel about the election will probably exacerbate those feelings. This is not really my opinion- this is what the data shows:
All you have to do is look at the chart. In 2008, Barack Obama is elected president and confidence numbers for Democrats shot up and confidence for Republicans came down. In 2017, President Trump is elected and the opposite happened. Let us look at the data going back to 1926 and see what the market has done over time when we have a Republican vs. Democratic president:
The only undeniable trend that there is over time is that the market continues to go higher regardless of who is in office. I have quoted investment writer Nick Murray before but I think this quote is timely: “The natural law of a free economy- and of the value of thriving companies which shape and are shaped by such an economy- is one of permanent advance punctuated cyclically by temporary decline. It was ever thus. A line drawn between the peaks and valleys of our economic life (and therefore of stock prices) always has a relentless upward bias. Let me say once more, because it’s the chapter’s mantra: the advance is permanent; the declines are temporary.”
I can already hear the pushback on what happens when there is a Democratic sweep vs. a Republican sweep, so let us look at the data on that:
Markets have fared very well under all scenarios. Often, investors expect radical changes from a democratic administration – higher taxes, more regulation. Investors expect tax cuts and fiscal conservatism from Republicans, and the results are usually not as radical as predicted. Let us look at two recent examples:
President Clinton- tax cuts, free trade, and record surpluses
President George W. Bush – record spending and deficits
Many times, there are certain expectations that are not exactly met. Another explanation is that sometimes it is just luck of the draw, there are circumstances beyond the control of the government like the environment that is inherited. President Obama came into office toward the tail end of the 2008 financial crisis and raised taxes and increased regulations. The S&P 500 returned 235% during his presidency. There is not a direct correlation between who is in office and what their policies are and the market and the economy. There are hundreds of variables from interest rates, commodity prices, corporate profits, geopolitical events, and many others that drive markets.
Overall, an election itself will not drive the markets. Who is sitting in the Oval Office is just one factor. We decided to leave UBS and start our own firm May 15, 2015. President Obama happened to be in office. Should he get credit for that? NO! Who was in office had no bearing on our decision-making process. Presidents get too much credit and blame regarding the financial markets. Businesses and people in general are always going to find a way to better themselves. Innovation and the human spirit will trump (no pun intended) any government policies. We would certainly appreciate a more business friendly environment, however I am confident the economic engine will continue regardless who is in office. Many investors went to cash when President Trump was elected only to see the market and economy take off for years. Making investment decisions based on political feelings is always a mistake. We will continue to try to make decisions that are in the best interest of our clients. Our job is to help our clients meet their goals, and we will continue to do so through this health crisis and the election and whatever else is coming our way.
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Regis R. Dillon, CFA, CFP®
Chief Investment Officer