Does The Election Matter For The Stock Market?
There is no consistent pattern linking either a Republican or Democrat president to better stock market returns. You could stop reading there if you wanted.
For those that expect a bit more from me, keep reading where I summarize the historical data as well as the facts regarding how Wall Street views each candidate.
In these weird times, understanding the likely effect of November's winner on your investment portfolio should help us all sleep better at night.
CONCLUSION - ONE PARTY IS NO BETTER THAN THE OTHER
Here are three truths to remember as we approach the November election and its resulting outcome.
There is no consistent pattern linking either a Republican or Democrat president to better stock market returns in an election year.
On average, market returns have been positive in election years as well as in subsequent years.
Market expectations associated with election outcomes are already embedded in current stock prices.
The reality is that there are so many different factors tugging on the stock market at any given time that it's a mischaracterization to claim one party is better for stocks than the other. Energy prices, inflation, taxes, war, interest rates, trade, consumer demand, and major weather events are just a few of the hundreds of factors that contribute to market returns.
That's not to say that a president doesn't have an impact on stock prices. It's just not as simple as saying this president or that president is better or worse for one's portfolio.
WHAT DOES THE HISTORICAL DATA SHOW?
Based on the graph below, we can see that for nearly the last 100 years, the stock market has experienced a relatively consistent upward trend under both Republican and Democratic administrations.
Click HERE for a full economic summary of each administration including control of House & Senate, unemployment, inflation, deficit, and GDP growth.
Below is a more specific look at the stock market's rate of return surrounding each election cycle.
Since 1928, the stock market (S&P 500 index), on average, has produced an 11.3% return during an election year and a 9.9% rate of return the year following a presidential election.
To see a full summary of how the U.S., International, Emerging Markets, and even Bond markets have done under various presidents, be sure to check out our full infographic slide deck by clicking HERE.
BUT THIS ELECTION IS DIFFERENT!
Maybe it is. Or, maybe it just feels that way?
I'm old enough to recall that during every election going back to Bush vs. Kerry, there were dire warning calls that "This election is unprecedented". It's not wrong to say that 2020 is different (every election is different), but at the same time, we need to recognize that each election introduces a new set of circumstances.
If history is any predictor of future outcomes, then even though this election might seem especially dire on both sides, the likelihood that next year's stock market will deviate from historical norms isn't probable.
Even with a pandemic ripping through the economy, a massively accelerating wealth gap, and civil unrest at every corner, the stock market is still up 5.6% year to date as of October 6th. If Biden wins the election, it's likely the stock market achieves further gains getting us closer to that 11.3% election year average. Read on to see why.
WHAT WALL STREET THINKS
In order to assess how mega money managers view this election, we should examine where the money is flowing.
Looking at political contributions from both Wall Street firms as well as individual contributions from employees at those firms, the Biden campaign is receiving 3x to 6x the amount of money the Trump campaign is.
The numbers vary a bit based on when the data is analyzed as well as which Wall Street firms we're looking at. However, here's a news sampling to form your own conclusions and consensus.
They saw record profits under Trump. Bankers are backing Biden anyway.
Wall Street donors reportedly favor Biden over Trump in 2020 election.
- NY Post
Joe Biden’s Campaign Is Awash in Wall Street Cash.
Wall Street is shunning Trump. Campaign donations to Biden are five times larger.
If you skipped reading those, I'll sum it up for you. Generally, Wall Street favors predictability. Trump is an unknown commodity that complicates decision making at publicly traded companies, especially those on Wall Street. Regardless of your personal opinion, no one can deny Trump is erratic by nature.
In just the last 24 hours, he has called off additional stimulus talks, sending stocks into negative territory at the 11th trading hour. Then, later in the day, he reversed course by stating to House Majority leader Pelosi and Secretary of the Treasury Steve Mnuchin that he would sign whatever deal they put on his desk.
Like the rest of us, Wall Street is tired of guessing which way the Trump winds will blow and just want some consistency.
WHAT YOU SHOULD DO IN YOUR PORTFOLIO
The best thing to do is to continue the maintenance of whatever strategy you've had in place (unless it's bad, then definitely call us). In all seriousness, the only exception to tinkering with your portfolio is if the news cycle and its potential effect on your investments is physically keeping you up at night.
If this is the case, it probably means you are taking too much risk represented by the percentage of stocks currently held in your portfolio. If the fear of the unknown is consuming your thoughts, then the potential long term expected return of stocks just isn't worth it.
However, if you believe that no matter what happens after the election, people will still buy groceries from Kroger, binge watch Netflix, and fill up their tanks at Chevron, then you shouldn't make any portfolio moves. Corporations will continue to sell their widgets, and the stock market will chug along.
All you need to do is watch your portfolio. If stocks drop, then trim bonds and buy more stocks. If stocks appreciate, then trim your gains and buy bonds. This is basic rebalancing, and it's extremely useful for long term financial planning decisions such as how much income you can reasonably expect from a portfolio throughout retirement.
If you want to talk things over or check in on how your current portfolio is invested, just reach out. You don't even have to be a client at Aspen Leaf Wealth Management. We'll show you exactly where you're portfolio sits and what step(s) you should take to get it where it needs to be. Don't worry, you're not subjecting yourself to a timeshare presentation with endless heckling. We're not salespeople like the rest of the financial industry!