Your Number and ‘Their’ Number Will Probably Not Be the Same This Election Cycle

Money and politics are deeply emotional topics. As the election approaches, depending on which 50% group you are in, it might seem that the other party is going to run the country right off a cliff. The question is always the same: Should we sell now because the world feels like a scary place? Fortunately, markets are more resilient than politicians, and the answer you may or may not want to hear is: It depends. To a large degree, much of this depends on who you are listening to. Most of us already know what outcome we desire, so we seek viewpoints that support it. Our viewpoints are subjective, and they include our own biases. Here is how the stock market has performed under different party scenarios historically.

 

 

The S&P 500 performed best under Clinton, advancing by 209% if you consider his entire term in office. Since Kennedy, the Democrats have generally performed better overall if we are using total return for the entire term of office. However, if you use annualized performance, Clinton still had the best return of 15%, but Trump was close behind at 14%. On a broader scale, Republicans had four presidents with double-digit annualized returns while Democrats had only three. Which result should you put more weight on?

 

 

What if we focus on investment results for the election year alone? Since Hoover in 1928, the S&P 500 averaged a 15% return under Republicans and 7.6% under Democrats. If only one year is important to you, the choice seems clear. If that answer doesn’t fit your desired outcome, just tweak the answer to: When a Democrat was in office and a new Democrat was elected, the average return for the year was 11%, closing the gap to your outcome. Are you starting to see how the numbers can be framed to support certain viewpoints?

 

 

Let’s also consider the difference between market perception versus market reality. In 2016, when Trump’s victory surprised almost everyone, the stock futures market declined about 5% on election night— as the biggest unknown in political history (at least that was the perception) took charge of the country. By the close of the next day the market rebounded, and within 40 days it was up almost 6%. What seems obvious isn’t always accurate.

 

 

If we go back to 1953 and look at annual market returns for a Republican sweep versus a Democratic sweep (controlling both the presidency and Congress), Republicans have the better result at 12.9% as opposed to 8%. However, if you change it to a Democrat being president and Republicans controlling Congress, the return is 16.3%. In the reverse scenario, which is a Republican president and Democrat Congress, annualized returns drop to only 4.9%. Economic results and stock market returns can be massaged to fit any argument. Be cautious of anyone claiming one party is the glaring choice over the other when it relates to the stock market— it is more complicated than that.

 

 

The good news is that our democracy’s checks and balances make it almost impossible for one person to single-handedly wreck the economy. One would think that a change in corporate tax rates would have an impact, but even that evidence is not clear. What might matter most is that the S&P 500 has an average total return of 11.2% for all presidential election years. You can play with the time periods and definitions all you want, and in the next two months, you can be sure they will be manipulated by both sides. Either way, it is crucial to know what the context is before you make any conclusive decisions. You can bet the prognosticators will not provide any.

 

 

Remember this is purely an exercise in stock market performance, it says or implies nothing about the social differences between the candidates. The one point that most people can agree on is that they will be glad when it is over.

Observations On The Market No.398