Do presidential elections really impact the markets as much as we think?
By Raz Pounardjian | August 6, 2020 | View This Email In Your Browser
One of the most common questions I am hearing from clients and investors is “What will happen to the stock market with the upcoming presidential election?” I decided to look at the returns of the stock market prior to and after presidential elections to see what conclusions could be derived. Here is what I found:

The stock market has a good track record of telegraphing who wins in November

Since the Great Depression, the theory is that if the S&P 500 is positive in the three months before the election, that the incumbent party will win. If it is negative, the incumbent party will lose. The chart below from LPL Research shows that the S&P 500 correctly predicted the winner in 20 of the last 23 elections (87% hit rate).
Remember that the stock market is a discounting mechanism, it looks ahead, not behind. The stock market does not like uncertainty and if a new party is likely to come into the White House, the market tends to discount it with negative returns before the election. It is interesting to note that since 1984, this indicator has been right 100% of the time.

Many of the bold predictions about market behavior turn out to be wrong

Grand predictions are great for headlines and clicks but they usually turn out to be wrong. Dallas Mavericks owner, Mark Cuban, was asked what would happen to the stock market in 2016 if Donald Trump was elected, he said “I can say with 100% certainty that there is a really good chance we could see a huge, huge correction.” The S&P 500 was up the day after the 2016 election and is up 64% since Trump was elected president.

Michael Boskin of Stanford’s Hoover Institution wrote an op-ed in the Wall Street Journal titled “Obama’s Radicalism is Killing the Dow” on March 6, 2009. Boskin wrote:

“It's hard not to see the continued sell-off on Wall Street and the growing fear on Main Street as a product, at least in part, of the realization that our new president's policies are designed to radically re-engineer the market-based U.S. economy, not just mitigate the recession and financial crisis.”

The date of his op-ed was one day before the stock market bottomed from the Great Financial Crisis.

We mistakenly correlate past and future returns of the market based on our political beliefs

Below is a chart I put together of stock market returns by president:
Conventional wisdom is that Republicans are good for markets because they tend to be pro-business and for lower taxes while Democratic presidents are bad for the markets because they usually favor higher regulations and government spending, which can crimp economic growth. While in theory this make sense, the stock market returns do not reflect this belief. I am not saying Democratic presidents are better than Republicans for the stock market but there is little correlation about the direction of the markets based upon who wins in November. Note that since 1932, only one president had a negative return during their entire term.

The timing and occurrence of many exogenous events that happen during a presidential term have a greater impact on the direction of the markets and are mostly out of the hands of the President. The low-return “death of equities” period of the 1970s followed by the expansion of credit from the Ronald Reagan/George Bush years led to incredible gains during their terms. The Bill Clinton presidency began right as major technological advancements such as the internet and email were born. George W. Bush had to deal with the tech bubble bursting followed by the September 11th terrorist attacks at the onset of his presidency. Barack Obama had the benefit of entering office after one of the largest drawdowns in the stock markets history as the Great Financial Crisis was ending.

This does not mean presidents cannot influence economic policy but the impact it has on the markets is not as much as people think. Presidents are in office for only four-year terms which is a very short period. They need to be able to work with Congress to enact economic, social, and environmental reforms, some of which get done but in a way that appeases both parties.

Lastly, using your political beliefs to make investment decisions is not a good combination because there is almost no correlation between the two - the stock market does not care about your political beliefs. Remember that the greatest investor of all-time, Warren Buffett, has bought stocks regardless of whether a Republican or Democrat was in office.

You will hear doomsday predictions from both sides of the aisle in the coming months but remember that long-term, the stock market does not really care about them.
 
I hope you are staying safe and healthy. Thank you for reading.
Raz Pounardjian
Portfolio Manager
30300 Chagrin Blvd., Pepper Pike, OH 44124
Direct: 216.706.2811 Cell: 216.272.4320 Fax: 216.523.8380 Toll-free: 800.321.2322

Carnegie Investment Counsel is a registered investment adviser with the Securities and Exchange Commission (SEC). The opinions presented are subject to change without notice. Performance information was obtained from third party sources. Although these sources are widely used, and Carnegie deems these sources reliable, Carnegie makes no guarantee as to the accuracy of the information provided by these third parties. The information provided is for general informational purposes only and should not be considered a solicitation to effect transactions in securities or personalized investment advice. Past performance is not a guarantee of future performance.
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