With the Presidential election less than a month away, you likely have questions over which candidate is better for the stock market. While conventional wisdom says that Republican Presidents are better for the stock market, historical market performance suggests otherwise. The table below shows the performance of the DJIA under every President since 1900 from the time they took office to the time they left. For the 12 Republican presidents since 1900 (including Trump), the DJIA’s average annualized return during their tenure has been a gain of 3.5%. For Democrats, though, the average is nearly twice as much at 6.7%. Since WWII, the spread between Democrats and Republicans is a bit narrower (7.5% vs 6.1%), but still favors a Democrat President.
Six Potential Outcomes
In the limited sample size of US electoral history, certain partisan outcomes are frequently viewed as more favorable for investors than others. For example, instances of a divided Congress under either presidential administration since World War II have delivered a 13.4% median annual return historically. The market may appreciate America’s system of checks and balances.
Odds of a Biden win have increased over the last couple of weeks. So have the odds of the Democrats winning the Senate. The House of Representatives outcome has never really been in question. A lot can change in the last 4 weeks of an election cycle so any particular outcome is still possible.
The financial markets – which don’t see Red or Blue, they only care about Green – would likely prefer some form of divided government as this would mean more gridlock in Washington and reduce the risk of significant policy changes in either a far right or far left direction. As you can see from the chart above, Republican President’s tend to do better when Republicans control Congress, while Democratic President actually do best with a divided Congress or a Republican Congress (who’d of thunk that!)
Right now, we think the most likely outcome is some form of divided government. If Trump wins, the Republicans likely retain the Senate, albeit with a smaller majority than the present 53-47. If Joe Biden wins the Presidency, it is likely that the Democrats take the US Senate, but it would likely be a very narrow majority.
There’s no question that higher taxes are coming as the Federal debt has skyrocketed and has to be paid for at some point. If Biden wins, tax hikes are more likely than if Trump wins but it all depends on the outcome in Congress.
If the Democrats were to sweep, we would imagine at least several Democrats balking at immediately imposing tax hikes. Remember, when President Obama took office in 2009, the Democrats had 59 seats in the US Senate, and taxes didn’t go up until 2013. This was because Democrats were hesitant to hike tax rates when unemployment was high and the economy was slowly recovering from the Financial Panic of 2008-09. On the other hand, a Democrat sweep likely means significant stimulus spending to boost the economy. They will also favor sectors like healthcare, infrastructure, and clean technology. Conversely it would be a less favorable climate for several sectors such as fossil fuels, defense, and financial services.
No matter the outcome THE MARKETS ARE IN THEIR OWN UNIVERSE, stoked by the likelihood of ultra-low interest rates for years to come and a Federal Reserve that is committed to keeping the economy afloat. Probably the most important point is to stick with the overall game plan and stay invested, as can be seen from the chart below.
Staying Invested vs. Investing in Single Party
While this is the long-term outlook post-election, there is likely to be hightened volatility around election day due to Covid-19. The virus is causing many more people to vote by mail than in previous elections. This means that a winner is likely not declared on election night. Bear in mind, the news media – which loves to be the first to declare anything – is not the final arbiter of the winner.
The Secretary of State in each state certifies that state’s election result. When Americans vote for the presidential and vice presidential candidate of their choice, either by mail or in-person, this November, they will actually be casting a vote for a slate of electors, equal to the number of a state’s electoral votes, who will cast a vote on their behalf in their respective state capitals on December 14. Most states pledge all their electoral votes to the winner of the popular (citizen) vote. Some allocate their electoral votes proportionally.
In this highly partisan environment another risk looms – “faithless electors” (electors who do not cast their electoral vote for the candidate to whom they are pledged). This is a real potential in states with divided governments, like Pennsylvania and Michigan, where the Governor is a Democrat and the Legislature is Republican controlled.
There are all sorts rules that are arcane and confusing – there is even a scenario (extremely remote) where Trump is named President and Harris is named his VP. I won’t delve into those here other than to say fasten your seat belts – 2020 is likely going to be a repeat of the “hanging chad” in the 2000 election between Bush and Gore. Recall that election was final until a Supreme Court decision on December 12, 2000.
Most importantly in 2020 it is important for all of us to cast our vote – just be safe while doing so.
Let us know if you have any questions.
Sources: Bespoke Investments, Bloomberg, Charles Schwab, Goldman Sachs Asset Management, CNN
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