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With the presidential election fast approaching, it’s natural to ask: How is the election going to affect my investments… and is Beacon doing anything to prepare for the election, based upon who wins?
First off, if there is one lesson we all were reminded of from the unexpected British vote to leave the EU earlier this year, it’s not to try to predict how a country will vote. Polls can be very misleading, so our message is: Don’t spend much of your time and energy into trying to identify any leading indicators or clues to which candidate will win. As with other potentially disruptive events, the key is to keep your fears and emotions in check.
It’s a common belief that the U.S. stock market will do better under a Democratic presidential administration, but the evidence is mixed. According to research by Campbell and Li in 2004, there is no conclusive evidence that elections consistently impact U.S. market returns.
On the other hand, Sam Stovall, the chief equity strategist at S&P Global Market Intelligence, points out that the average compound annual growth rate for the S&P 500 was 3 percentage points higher during Democratic administrations (9.7%) versus Republican administrations (6.7%) ever since the 1944 third re-election of Franklin Roosevelt.
The Long View
But consider this: The S&P 500 Index, the most common measure of large cap stocks, has finished up in more than two-thirds of all calendar years since 1926. And if you’re counting, we have seen eight Republican and seven Democratic Presidents since that time.
Historically, the presidential election year tends to be a satisfactory year for stocks. Recently we saw major U.S. stock indexes hitting record highs, including midcap indexes.
At Beacon, we have been very bullish on midcap or mid-size U.S. companies those with between $2 billion and $10 billion in market capitalization. For perspective, the average market capitalization of S&P 500 companies is about $38 billion. Midcap examples include Panera Bread, Dominos, and Fair Isaac and Company, creator of the FICO credit score.
Meanwhile, nearly one-third of S&P 500 companies have reported earnings so far, and of those, 69% have exceeded profit estimates. Does that have anything to do with the impending presidential election? No, but it sure can drive market sentiment, just like the latest jobs report announced by the Labor Department on Aug. 5. The report was that 255,000 nonfarm workers had been added to the employment rolls, keeping the unemployment rate just under 5 percent. That news was greeted enthusiastically by stock market investors.
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Bottom Line
There’s a lot more going on than the election driving markets, even though you’d think the election is the only thing happening in the world based on the amount of news coverage dedicated to it. Keep your eye on the fundamentals, microeconomics and macroeconomics, and invest for the time frame that’s appropriate to your personal situation. Chances are, it’s a lot longer than this election cycle!