- US stock market tends to do worst, on average, in final year of a presidential term
- Dow Jones has done better, on average, under a Democratic president
- Prospect of first presidential rematch since 1956 grows
- Lofty valuation of US equity market could yet confound students of market (and political) history
“The race to the White House and the presidential election on 5 November stepped up a gear overnight, with the first Republican Party primary in Iowa,” says AJ Bell investment director Russ Mould. “Equity markets initially dreaded the idea of a Trump victory in 2016 and although the Dow Jones Industrials ultimately rose during his four-year term, despite trade and tariff frictions with much of the world, investors will be watching out for policy statements from all the leading Republican contenders, even if Trump is the clear front runner at this early stage.
“A repeat of 2020’s Biden-Trump presidential contest is on the cards according to initial opinion polls. If they are accurate then America will get its first presidential rematch since 1956. Biden may well welcome that precedent, since that was when Dwight Eisenhower beat Adlai Stevenson for the second time to retain the presidency (even if the two-time victor was a Republican).
“Electoral rematches are rare, but investors may also look to history to see what the election may mean this time around, even in the knowledge that the past is no guarantee for the future.
“A study of post-1945 ballots shows that the US stock market traditionally gets a mild attack of the nerves in the final year of a presidency, as it is the weakest year on average using the Dow Jones Industrials as a benchmark. That said, the final year of a Democratic presidency has on average yielded a double-digit percentage capital return while the Republican numbers are punctured by the market collapse of 2008 as the Great Financial Crisis pulled the rug from under the American (and global) economy.
Source: Refinitiv data. Based on calendar year from inauguration day (20 January) and the performance of the Dow Jones Industrials index
*John F. Kennedy assassinated in November 1963 and replaced by Lyndon B. Johnson
**Richard M. Nixon resigned August 1974 and replaced by Gerald R. Ford
***Joseph R. Biden’s first term concludes on 19 January 2025
“This caution in the final year of a presidency is less pronounced under the Democrats and that may reflect nothing more than markets’ fears of a swing to the right and a more hair-shirt approach to economic policy under a Republican president.
“Markets initially viewed Trump as a risk to markets before his election victory in 2016, thanks in particular to his policies on trade and international relations. However, US stocks advanced smartly during his presidency, despite Covid-19.
“As such, it may not pay to get too caught up in the identity of the winner of either the party races or indeed the presidential election, where the thought of an 81-year-old Biden grappling with the 78-year-old Trump for the second time is prompting independents to consider a run. Robert F. Kennedy is planning just such a bid and that could make predictions even more dangerous than usual – H. Ross Perot’s Reform party’s presence in 1992 opened up the door to a Democratic win for Bill Clinton over the incumbent Republican, George H.W. Bush, at least in the eyes of some, not least because Perot bagged 19% of the vote.
“However, Bush’s 1992 defeat was as much down to the US recession of the time. The state of the US economy will have a huge influence on both the 2024 ballot and the American financial markets for good measure.
“Federal Reserve policy will be one huge factor here and the central bank is independent – although some may be tempted to argue it caved to presidential pressure from Donald Trump when it pushed through three interest rate cuts in 2019. It is also unlikely that chair Jay Powell and colleagues will want to oversee a recession during the year of a presidential election and markets remain convinced that the Federal Open Markets Committee is poised to sanction half a dozen interest rate cuts in 2024, starting in March.
“Vigorous levels of government spending will influence the economy too and right now America is spending like a drunken sailor. The $1.7 trillion deficit racked up in the fiscal year to September 2023 was the third worst on record and the pace held in the early stages of fiscal 2024 would suggest an even bigger number is on the cards.
“That is boosting the economy – and thus corporate profits – now, but whether it is sustainable is an open question.
Source: FRED - St. Louis Federal Reserve database and Congressional Budget Office
“Going back to the data, the impact of the wider macro backdrop upon US equity market performance seems pretty clear. Investors and voters alike gave credit to Ronald Reagan for the reforms he promised and then initiated to drag the US out of an economic funk in the early 1980s.
“The recessions of 1948-49, 1954-55, 1957-58 and 1960-61 did not unduly harm stock market performance under Truman, Eisenhower, Kennedy and Johnson, but the Dow Jones sagged during the 1970-71 and 1973-75 downturns during the Nixon/Ford years. George W. Bush had nothing to do with the tech bust at the turn of the millennium, or the collapse of the US housing market, but the recessions of 2001 and 2008-09 mean that the Dow did badly across both of his terms.
“The economic booms of the 1950s and 1980s and the recovery from the 2007-09 bust (helped by Fed largesse) meant the stock market did well under Truman, Eisenhower, Obama and Trump.
“But investors must also account for equity valuations, and this may be an even bigger complication than the tattered state of America’s federal finances.
Source: www.econ.yale.edu/~shiller/data.htm, www.multpl.com
“Using Professor Robert Shiller’s cyclically adjusted price/earnings (CAPE) ratio as a benchmark, the S&P was trading on historically lowly valuations in 1949 and 1953 when Truman and Eisenhower took office, while the ravages of inflation in the 1970s meant the valuations were rock bottom when Reagan took over in the early 1980s.
“That created plenty of potential for upside and the same could be said of when Obama became President in January 2009, just as the financial crisis was abating and a bear market had wreaked havoc.
“By contrast, George W. Bush came to power just as the TMT bubble had driven valuations that made even the dizzying (and disastrous) heights of 1929 seem modest. In his case, almost the only way was down and, with the Shiller CAPE multiple back near historic highs, the next president and investors could be forgiven for wondering what may come next – especially if the US economy unexpectedly slows right down or even lurches into recession.”
