Luke Ferraro | Director of Investment Research
To date, 2020 has been a unique year for the financial markets. A global pandemic and domestic social unrest collided with unprecedented fiscal and monetary policy support, resulting in bond yields at/near record-low levels and new highs across many sectors of the stock market – including the widely followed S&P 500. Just as investors have caught their collective breath after what can only be described as a volatile ride, a presidential election looms in less than three months.
Party affiliation aside, there is much trepidation surrounding the election. The rhetoric from both sides of the aisle can best be characterized as strident. The divisiveness feels like it is at peak levels. Add to this the ongoing social debate; anxiety and unrest in this country are high.
Hopefully, most citizens will exercise their rights and shoulder the awesome responsibility and privilege of voting Tuesday, November 3.
The bigger question for investors: Does the election cycle matter to the stock market? (see below) This is not an easy question to answer and very dependent on a lot of other factors.
Many market participants are surprised to learn that, since 1976, the average annualized return under Democratic presidents has been 14.3% against 10.8% under Republicans. A continuously held Democratic portfolio (Carter-Clinton-Obama) outperformed a continuously held Republican portfolio (Reagan-Bush Sr-Bush JrTrump) 14.9% to 4.9%. However, when looking further, one can see that it is a small sample size and heavily influenced by the second Bush’s presidency, which was Election Year Market Impact Learn more at monetagroup.com bookended by 9/11 and the Tech Wreck on the front end and the Global Financial Crisis in the latter stages. Many events that influence the markets are beyond the control of the president.
There has been a significant amount of research conducted on both election year performance and the performance under various scenarios (one party sweep; Democratic president, Republican Congress; etc.). While most of the sample sizes are relatively small, a few patterns and thoughts emerge.
- There is a relatively consistent “Presidential Cycle” to the market’s performance that shows the first two years of a presidential term tend to have below average returns while the second two years tend to have a higher return. This could be attributed to a variety of reasons, such as the influence of mid-term elections and a president’s thoughts and policies turning towards reelection in the last half of the term.
- In the short term, fear and hope around a president’s proposed policies can influence the markets, but over the longer term it is the impact of those policies on the economy and corporate earnings that matters.
Over the longer term, the economy itself matters more than the person in the White House. Growth, inflation, earnings, interest rates and independent monetary policy all are the most influential forces in driving long-term returns. The economy and the markets, while influenced by politics, want to grow and are more significant than which way the political winds are blowing. It is also very important to remember that the mid-term elections provide the opportunity for course changes if the public is unhappy with the health of the economy and the markets.
The election is an important milestone and will have some influence on the markets. However, in the near and intermediate term, the fiscal and monetary stimulus that is being provided are a larger factor in our opinion and unlikely to change regardless of the November election. Those extraordinary policies in the form of low interest rates, enhanced benefits and stimulus checks have provided something of a safety net for the broader economy and to date, a powerful tailwind for the stock market.
Index Definition: The S&P 500 Index is a market-capitalization-weighted index of the 500 largest domestic U.S. stocks. Indexes are unmanaged; you cannot invest directly in an index. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Index returns are not representative of actual portfolios and do not reflect the costs and fees associated with any particular investment or the management of an actual portfolio. Past performance does not guarantee future results.
© 2020 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You cannot invest directly in an index. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.