What the race to the White House means for investors

After the pared-down, virtual Republican and Democratic Party conventions in Charlotte, North Carolina and Milwaukee, the race to the White House and the US Presidential election for 3 November is well and truly on between the Trump/Pence and Biden/Harris tickets,” says Russ Mould, AJ Bell Investment Director. “The pending four-yearly poll gives investors something else to mull over as they also continue to wrestle with how the pandemic will continue to affect the world’s largest economy. The political temperature will only rise from here, with three presidential television debates scheduled for 29 September, 15 October and 22 October and one vice-presidential contest on 7 October before Americans head to the ballot box.”

“In very crude terms, investors might expect the US stock market to prefer a Republican President to a Democrat one, with the Grand Old Party generally seen as being in favour of small(er) Government and less inclined to interfere in business matters and free markets than the Democrats.

“However, it generally has not worked out like that, at least not in modern times. 

“Over 18 Presidencies since the election of Harry S. Truman in 1948, the Dow Jones Industrials has, on average, done better under Democratic Presidents than it has Republican ones. Even more intriguingly with 2021 in mind, the Dow has done much better in the first year of a Democratic term than it has a Republican one, with an average gain on 13.1% compared to 2% from their rival incumbents.

The Dow Jones has tended to perform better under Democratic Presidents than Republican ones, especially during the first year of a term

Source: Refinitiv data. * 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. *** Data for Donald J. Trump as of 17 August 2020. Data taken from date of inauguration, not calendar year.

“It therefore is not as simple as ‘Republicans good, Democrats bad’, when American politics is assessed through the very narrow prism of the US stock market. This is particularly the case now when the Republicans were running up the sort of budget deficits that would make even the most ardently pro-spending Democrat blush, even before the pandemic forced an emergency fiscal response.

“Moreover, if investors cast their minds back four years ago, the Democrats’ Hillary Clinton was then seen as a bit of a shoo-on for the 2016 election, as the Republican’s Trump had surprised everyone by winning the Grand Old Party’s nomination. Trump was also widely perceived as a potentially negative result for markets, thanks to his sabre-rattling on issues such as diplomatic relations with China, Iran and Mexico and desire to rip-up several trade agreement, including the North America Free Trade Agreement (NAFTA).

“But that isn’t how it turned out.

“The Dow Jones Industrials index is up by some 40% since Trump’s inauguration on 20 January 2017, thanks to what had been a steady economic expansion, tax cuts and an accommodative US Federal Reserve, which had pretty quickly backed away from raising interest rates and sterilising Quantitative Easing, even before COVID-19 swept around the globe.

 
Source: Refinitiv data

“This suggests that there is more than just politics at play when it comes to how a stock market performs, with monetary policy, economic performance and the possibility of exogenous shocks (such as a pandemic) all factors to be considered, among others, even before we get to the vexed issue of valuation. 

“This view is supported by the identity of the best and worst performers in the broader S&P 500 index during the Trump Presidency to date. The best 20 capital returns have generally come from tech stocks and the worst 20 from oil and oil-related firms and stricken property, retail and travel firms. Barring the President’s passion for Twitter and his occasional calls for lower (and then higher) oil prices, the degree to which the White House’s policies have had a role here is far from clear.

The best and worst 20 performing S&P 500 stocks of the Trump Presidency to date

Source: Refinitiv data 

“That said, Trump has undeniably been influential, from his market-pumping tweets to his economy-pumping tax cuts. How much bearing November’s winner has upon financial markets’ performance will to a degree depend upon which party wins the House of Representatives and the Senate, so investors will need to consider this too. Trump has achieved less in the second half of his term as the Democrats have controlled both houses on Capitol Hill.

“The tricky things is sorting out the policies that are just electioneering and slogans from the plans that may actually be enacted. As the economist Robert Sowell once noted: 

‘Economists are often asked to predict what the economy is going to do – but economic projections require predictions what politicians are going to do and nothing is more unpredictable.’”