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Election Day is fast-approaching and with that comes intensifying speculation regarding which candidate – former President Donald Trump (R) or Vice President Kamala Harris (D) – will be better for the economy and financial markets.
While many retail investors and clients are apt to join the performance of financial markets at the hip of the broader economy, advisors know better. And since we’re talking about elections, here’s a great example: the S&P 500 rose 51% during George H.W. Bush’s lone term in office, but a weak economy was his undoing as he lost to Bill Clinton in 1992.
Point is the stock market and the economy aren’t the same thing, yet when the economy, markets and politics intersect, many inexperienced investors often think there are linear outcomes. That also generates all that talk about under which party do stocks perform the best. What’s interesting about the answer is that elections don’t have the impact on stocks many clients believe those results have.
Using 130 years of Dow Jones Industrial Average history as the measuring stick, the blue-chip index’s average annual gain in non-election years is 0.53% --a modest advantage over the average increase of 0.46% in election years.
Policy Matters
Today’s increasingly savvy client base is likely able to tell the difference between the two parties’ economic and financial market stances. Republicans typically favor lower tax cuts as a way of boosting the economy while Democrats believe government spending drives GDP growth. Clearly, that’s a big departure and it does have some impact on stocks.
“Looking at the Dow’s history, the range of return spread between election and non-election years was around 1.56% when a Republican won the presidential election, higher than the 1.03% when a Democrat won the White House,” notes Daniel Ung, head of quantitative research analysis at State Street Global Advisors (SSGA).
Even with Republicans’ perceived stance as pro-business, the Dow’s election year/off year return spreads are wider under a president from that party than under a Democrat.
History also suggests that while investors view elections as potential contributors to equity market volatility, there’s usually more to the story.
“Although investors tend to circle upcoming elections on the calendar as potential risks, fundamental forces like the economy and corporate earnings may be the more important indicators of market volatility,” adds Ung.
With Elections and Sectors, Forget Conventional Wisdom
Due to the varying policy positions of the two parties, there’s persistent belief that some sectors perform better under a Democrat than when a Republican is president and vice-versa. There is some truth to that, but investors would do well to not get stuck on conventional wisdom as it relates to electoral outcomes’ effects on sectors.
Take it from someone that’s covered ETFs for 15 years. I’ve seen a lot of sector predictions tied to election results that turned out to be bunk. For example, plenty of folks thought Trump would be a drag on tech stocks and a boon for financial services names. During his term, the Nasdaq-100 Index (NDX) surged 245.6% while the S&P Financial Services Select Sector Index gained “just” 83.4% -- badly lagging the 130.5% returned by the S&P 500.
Conversely, Democrat presidents are seen as bad for fossil stocks and catalysts for renewable energy shares. Yet during President Obama’s eight years in office, the S&P Energy Select Sector Index far outpaced the S&P Global Clean Energy Index. That trend has continued under President Biden. Despite his promises to end fossil fuels, the S&P Energy Select Sector Index is up almost 104% over past three years, more than tripling the returns of the S&P 500. Over that same period the S&P Global Clean Energy Index tumbled 33.6%.