As the November 3 U.S. Presidential election approaches, the rhetoric and media coverage continues to ramp up, making it difficult to avoid – even if you tried. From the potential of history being made with the election of the first female, minority-background U.S. Vice-President in Democratic nominee, Kamala Harris, to the re-election of the ever-controversial Donald Trump, the endless sound bites and posturing are feeding the media machine like a gift that just keeps on giving.
But does any of it matter to long-term Canadian investors? The short answer is no – at least not in terms of warranting any change to their long-term investment plans. With that in mind, we offer insight into how U.S. equity markets have behaved historically during election campaigns. History shows broad market performance is more correlated to the economy, business cycle and corporate profits rather than election noise. Additionally, we offer insight into the political platforms of the two candidates and potential market reaction depending on which party wins the race.
Are election years bad for equity markets?
Intuitively, the final weeks leading up to a U.S. election suggest that market uncertainty would increase, and it would be best to keep out of markets until Election Day has passed and the next President has been chosen. But the data behind that view doesn’t hold up.
We looked back 36 years to 1980 and compared S&P 500 performance in all non-election years to that of the election years. We excluded 2008 from our analysis after concluding that the Global Financial Crisis was not influenced by the U.S. election so as to not skew the comparison results.
GLC’s myth bust: Election periods do not correspond to poor equity markets. Market results in the weeks before the ballots get counted were stronger than the average of that same time period for all years. Likewise, further gains, albeit lower than non-election years, continued to the end of the year once election uncertainty is in the rear-view mirror. In fact, staying invested straight through the entire calendar year and/or at least for the entire election period (from September 1 to December 31) was your best bet if taking guidance from the history books.
Are election years volatile?
Only the months before and after the 2008 election are shown to be meaningfully more volatile than the average for the year. We see the 2008 equity market performance as being more a function of the unfolding global financial crisis rather than the election, but we left the data in for comparison in this case. What about so far in 2020? Volatility is elevated in 2020, but at this point we see it as a reflection of the COVID-19 global health pandemic than any election-related factors. We see volatility remaining elevated throughout the rest of 2020 – with the election playing some role in that, but not significantly more so, than the ongoing economic issues caused by COVID-19 concerns.
GLC’s myth bust: While uncertainty does generally lead to market volatility, there’s nothing special about market volatility as it relates to the U.S. Presidential race.
Republicans are pro Wall street, and Democrats are pro Main Street, right?
Sorry, this one isn’t correct either – at least not if you’re looking to the stock market to keep score. Since 1980, U.S. equities have performed better under a Democratic President. Even when factoring out the 2008 Global Financial Crisis when George Bush was in power, Republican years still lag. Despite the current narrative suggesting that a Joe Biden victory (along with a Democratic sweep) would be bad for the stock market, history suggests a Democrat in the White House doesn’t dampen stock market returns. Every President going back to 1980 has enjoyed at least one year of double-digit returns. Notably, outside Presidents Reagan and G.W. Bush, whose terms were marked by two of the more severe recessions in modern history (early 1980s and the Great Financial Crisis), the averages across terms are remarkably consistent – hovering around the 14% mark.
GLC’s myth bust: Neither party is bad for equities. Stock market returns are more consistent with the economy driving markets than with the stripes of politicians at the helm in Washington. In short, stock markets perform very well outside of recessions!
Our advice? Stick with your plan! Take the media hype in stride and recall the foundational elements that went into developing your long-term investment plan in the first place. Unless your time-horizon, investment goals and/or risk tolerance have changed, an election year is no reason to do anything different. It’s best to remember the media is in the business of capturing our attention, not in helping to achieve one’s long-term financial security. You, supported by the advice of a financial advisor, are best positioned to accomplish that goal.
U.S. election considerations for investors
Now that we’ve confirmed that market performance is more correlated to the economy, business cycle and corporate profits than to election noise, let’s dig deeper into what’s on each candidate’s agenda to examine possible impacts on the U.S. economy, and North American companies. Setting aside a protracted contested result (see "What about a contested contest?" below), three outcomes are circulating as plausible scenarios:
U.S. election scenario 1 – the Status Quo (i.e., Trump victory, Republican-controlled Senate and Democratic-controlled House of Representatives)
Capital markets would be most stable under this scenario. U.S. politics continue along the same trajectory as the past four years. There is some risk of a more volatile, bombastic, erratic Trump as he is unsaddled from re-election concerns. These risks are most relevant to trade, U.S.-China relations beyond trade, and anti-trust pursuits as it relates to ‘Big Tech’ (for example, Amazon, Apple, Microsoft, Facebook and Twitter). Bear in mind, that Democrats have made similar rumblings about reining in the reach of “Big Tech”. They’ve proposed specific tax policies that seek to increase tax on foreign income and would hit U.S.-based multinationals (Big Tech among them). The tech sector derives 56.5% of its revenue from outside the U.S., compared with 39.7% for the S&P 500 as a whole.
U.S. election scenario 2 – Biden wins, but no “Blue Wave” (i.e., Biden victory, Republican-controlled Senate and Democratic-controlled House of Representatives)
Capital markets may embrace this whole-heartedly. Trade and international relations would likely improve under Biden (at least with allies), plus the market-unfriendly tax policies of the Democrats would likely be held in check by a divided Congress. A risk to market confidence with this scenario is that a gridlock makes further fiscal spending less forceful than otherwise would be the case under the alternative scenarios – creating a de facto tightening of fiscal policy at a time when the U.S. economy is reliant on government spending to manage through the pandemic crisis.
U.S. election scenario 3 – A Biden “Blue Wave” (i.e., Biden wins and a Democratic sweep of Congress)
Capital markets are likely to lose some ground. At face value, this outcome appears to be least favourable for capital markets. However, when we look further beneath the surface, the downside may not be as substantial as it first appears. While taxes, the minimum wage and regulations would be expected to go up, significant offset would arise due to a large increase in government spending, easing trade tensions and the likely weakening of the U.S. dollar. Additionally, while Biden’s platform calls for increased taxes, minimum wages and a beefed-up regulatory environment, the extent and timing of these initiatives remains unclear. The Democrats aren’t likely to hit the economy with all of these changes at full force while the U.S. economy is still recovering from the pandemic. For context, it’s estimated that the Trump tax cuts added $30 to S&P 500 earnings per share (EPS). Biden’s tax plan, if enacted as it is stated today, is estimated to trim $13 to $16 off S&P 500 EPS. At earnings multiples in the low 20X’s, this is equivalent to 300 to 350 points of the S&P 500 index, or somewhere in the neighbourhood of 8 to 10%. The fiscal spending and weaker U.S. dollar would add back to EPS, such that a mid-single digit impact is more plausible. It’s not necessarily good news, but it’s not a complete stock market rout either.
Trade remains the key issue for Canada and Canadian companies – The most important consideration from a Canadian viewpoint resides in the candidates’ attitude toward trade. Nationalist and protectionist winds are blowing globally. We see Biden as more friendly to allies on trade (including Canada). Whereas Trump’s recent Canadian aluminium tariff tirade shows that, despite a renegotiated NAFTA, trade tensions are never fully off the table. Beyond specifics to Canada, U.S. trade policy is an area where the President can wield substantive power without Congressional oversight. Both candidates have a desire to continue to see more onshoring and a decoupling of trade from China. The Trump narrative is well known already, but a second-term President Trump (unbridled by re-election concerns) could ramp up the pressure on China across a variety of fronts, including trade, technology and regional hegemony. As is the case today, President Trump is prone to initiating trade wars with a multitude of others – both friend and foe. All in all, Biden’s expected shift toward a more conciliatory tone with allies, along with a less erratic tariff policy and better respect for global trade institutions (WTO, OECD, G20 etc.), leaves a Biden victory as a positive on the U.S.-global trade front.
U.S. Dollar: More blue = weaker green(back) – A Trump win would put upward pressure on the greenback due to a tougher trade stance. A Biden “Blue Wave” win should bring about U.S. dollar weakness as trade frictions ease and deficits increase. Counterintuitively, in the very near-term post-election results, the U.S. dollar could rally on the uncertainty of a contested election, simply as a risk-off safe-haven asset.
Keeping the focus on active portfolio management – We expect the medium- to long-term impact of the U.S. election on capital markets to be muted. Whatever the outcome and impact, like all other events that carry uncertainty and elevated emotions, the key is to avoid knee-jerk decisions and not overreact. In time, markets have managed their way through much larger events. We don’t advocate making any wholesale changes to one’s long-term investment plan based on the results of an election.This does not mean that GLC’s portfolio managers aren’t paying attention. Quite the contrary. Where the rubber really hits the road for professional portfolio managers is at the stock level. Seeing through the noise to uncover future opportunities, understanding risks and appreciating the competitive landscapes that companies face (of which political realities are but one of a multitude of considerations) is what it takes to zero in on what will really drive a company’s fortunes and market performance. This happens every day for portfolio managers, whether it’s Election Day or not.
What about a contested contest?
Should the November 3 election result be close enough that it’s a hotly contested affair and one-side (both politicians and their millions of supporters) openly question the legitimacy of the results, post-election uncertainty has the potential to jolt risk assets in the very near term. There is the potential for election uncertainty to extend for days or even weeks. The only modern context is the 2000 Bush/Gore episode when the S&P 500 fell 5% in the period between the November 7 election and Al Gore’s concession on December 13. It’s difficult to know how instructive that experience is considering the S&P 500 was in the front half of what turned out to be a bursting tech bubble (-49% between Mar. 24, 2000 and Oct. 9, 2002). What is certain is our belief in the ability of the people of the United States to eventually move forward and for the capital markets to do so as well. Like in any uncertain circumstance, control your emotions, refrain from knee-jerk reactions and rely on a well-diversified investment portfolio to weather the storm. For more on this topic see our Supplemental: What If He Won’t Leave?Opens in a new window
Copyright 2020 GLC. You may not reproduce, distribute, or otherwise use any of this article without the prior written consent of GLC Asset Management Group Ltd. (GLC).
This commentary represents GLC’s views at the date of publication, which are subject to change without notice. Furthermore, there can be no assurance that any trends described in this material will continue or that forecasts will occur; economic and market conditions change frequently. This commentary is intended as a general source of information and is not intended to be a solicitation to buy or sell specific investments, nor tax or legal advice. Before making any investment decision, prospective investors should carefully review the relevant offering documents and seek input from their advisor.