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Presidential Election: How elections impact markets

Luke Sheather
Luke Sheather
Posted 19.10.2020 in Investment Planning
The countdown is now on for the 59th US Presidential Election. Democratic Nominee and Former Vice President, Joe Biden, will contest the highly unconventional and now coronavirus-survivor, Donald Trump, with the winner set to become the oldest leader in presidential history.

The voting on November 3rd also determines the crucial make-up of the Senate and House of Representatives. Whilst the House of Reps is expected to remain in favour of the Democrats, control over the Senate is tipped to be tightly contested. A Democratic victory within either the Senate or the Presidency (but not both) will place the government in “gridlock”, which ultimately impacts the effectiveness of the presidential policy agenda.

The lead up to any election is often characterised by uncertainty and volatility as markets try to gauge an understanding of a) the probability of either candidate winning, and b) the likely impact of their proposed policies, should they be passed.

Indeed, this election year is no different. Although it would be fair to say the campaigning to date has been somewhat disappointing and has provided very little by the way of direction and policy agenda. The First Presidential Debate in Cleveland was a disaster, or as CNN journalist Jake Tapper so eloquently summed it up – “a hot mess, inside a dumpster fire, inside a train wreck.” Unfortunately, these failed opportunities to enlighten the public of a future direction only intensifies short-term market volatility.

From what we have been able to make sense of so far, if Mr. Trump were to remain as President, we would expect his low corporate tax rates to continue. However, should Mr. Biden be victorious there is every chance these will be repealed, at least partially, in favour of a stimulus package aimed to benefit households. It’s also probable that the Democrats will push for increased regulation in relation to competition and data privacy within the dominant tech sector.

As for the probability of either party winning – flip a coin. Most polls suggest Joe Biden is the favourite, however pollsters have undoubtedly lost some credibility in recent times when it comes to predicting election results. Last election, state polls had Hillary Clinton comfortably winning the battleground states only to be proven wrong. Similarly, in Australia last May we saw Scott Morrison refer to his election victory as a “miracle” after national polls had completely written him off.

Regardless of who wins the presidential election, history tells us that there is no clear pattern between share market performance and who is sitting in the Oval Office.

It is often generalised that Republicans are more “market supportive”, given their tendency to favour tax cuts over redistribution of income. However, evidence suggests markets have performed better under the Democrats. Going back to 1926, the average share market return under Democratic leadership was 14.94%, versus only 9.12% under Republicans. 1 Though we can’t be reading too much into this. Attributing share market performance to the current President in charge is not always reasonable. For instance, there have been numerous former Presidents that have walked into a baptism of fire, triggered by an uncontrollable market event or perhaps some not-so-tidy work by their predecessors. Notably, Barrack Obama was sworn into presidency amidst the Global Financial Crisis in 2009. Similarly, Herbert Hoover wore the brunt of the Great Depression collapse. But were these Presidents really to blame for these crises?

Conversely, President Trump inherited a booming economy and share market, only to be upended by the pandemic.

The problem is, it is incredibly difficult to isolate the impact of a President’s policies in amongst all the other things going on in the world. Commodity prices, trade agreements, inflation expectations, even global pandemics are all likely to have a more meaningful influence on the market. Hence in explaining the historical performance of the two parties above, we can only conclude that Democratic presidents have overseen periods when the world has done better relative to expectations, than the world did when Republicans were in office.

As investors watching on, it’s hard not to get caught up in the intrigue. Politics can bring out strong emotions and biases but it’s important not to let these feelings affect our decision making. Ultimately, markets learn to live with whoever is President and we shouldn’t change the way we invest based on the outcome. Certainly, once this election has concluded we can expect markets to quickly shift its focus back to more important issues, such as COVID-19. My advice in the interim would be to stay focused on your long-term investment plan and enjoy the spectacle of the attention-grabbing, American fanfare.

1 Share market = S&P 500 Index. https://www.mcleanam.com/are-republicans-or-democrats-better-for-the-stock-market/

Source: https://www.dimensional.com/au-en/insights/how-much-impact-does-the-president-have-on-stocks

Luke Sheather
Luke Sheather
Luke Sheather
As Capital Partners Investment Specialist, Luke does far more than simply identifying and recommending investments, Luke sees it as his role to help clients contemplate and answer life’s big questions.

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