It’s a question we get quite often, especially as we approach the US election on Nov 3rd. The quick answer is …
- Presidents, whether Republicans or Democrats, have less power over the economy than widely believed.
- Where we are in the economic cycle will usually dictate the stock market performance over a President’s term.
Let’s have a look over the last 40 years…
- Since 1976, the average annualized return on the stock market under Democratic presidents has been surprisingly higher at 10.68%, compared to 6.83% under Republican presidents.
- However, when we exclude the Great Financial Crisis of 2008, during Republican President George Bush’s term – the roughly 4% difference decreases by almost half
- This example shows how the events that affect the stock market the most, either positively or negatively, are beyond the control of any President and have their cause in macroeconomic forces rather than domestic policies. Those events can include wars, demographic shifts, financial irresponsibility, and now we can add pandemics to the list
So why do the Presidents have so little impact on the stock market?
1. Policies take time to work through the system; they don’t have immediate results.
For example, the Obama administration pushed for zero-carbon policies, so you would expect clean energy companies to do well in the stock market. However, the index representing those stocks was flat during his term. Interestingly, that same index appreciated during Trump’s last year, despite his policies taking an opposite stance.
2. On the other hand, some policies don’t have any impact on stocks – specifically when they go against longer-term trends.
For example, President Trump had the American First Energy Plan to promote fossil fuels. But, the companies representing this index had poor returns throughout his mandate.
3. Sometimes, policies may seem to correlate with the stock market, but after more careful observation, there’s no real causality.
For example, In December 2003, President Bush signed an act to improve medication access. We could be led to believe that the reason why healthcare stocks did extremely well up until 2007 was because of this. However, if we consider that in the same period, there was a natural increase in spending per capita on healthcare and an aging baby boomer population. This would also explain the increase in healthcare stocks
The Key Takeaway?
Although there is a lot of market noise around the US presidential elections, the reality is that the economic cycle and the ongoing long-term trends will determine stock and sector performance over time.
On behalf of TWM Group, thank you for watching. See you next time.
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