Stocks & Elections

"Wall Street’s long-running view that Hillary Clinton would easily become the next president has been replaced by a new fear that Donald Trump could win, and it probably won’t be a pretty picture for stocks if he does. Bond yields have moved lower and so have stocks, as the markets have begun to react to the possibility of a Trump victory in the last several days... The work of two economics professors may provide a glimpse of how the stock market might react if Donald Trump were elected... their findings point to a sharp immediate sell-off if Trump wins and a slight rally if Clinton wins... 'We think the market is 10 percent higher under Clinton than Trump, if Clinton wins it should be up about 3 percent and if Trump wins, it should go down 7 percent.'"

- CNBC article, November 3, 2016

The quote above reflected the conventional wisdom around the time of the 2016 election. Donald Trump was a loose cannon, Wall Street preferred Hillary Clinton, and a Trump victory would probably be bad for stocks. As polls closed and it became clear Trump had won, overnight S&P 500 futures declined about 5%.

By the following day's close, the S&P 500 was up more than 1%. Over the next four years, the benchmark returned 66%, which is better than average for a presidential term. I hope the economics professor who predicted the 7% decline learned a valuable lesson: Don't make predictions about the short-term direction of the market!

I calculated the S&P 500's historical total returns from the November of a Presidential election through the October preceding the subsequent election, starting with Eisenhower's victory in 1952. Here are my three big takeaways:

1. Stocks did well regardless of election results, but they did better under Democrats

In the 12 months following an election, the S&P 500 averaged a 12% total return. Counterintuitively, it was only about 5% for Republican Presidents but more than 20% for Democrats. I suspect this says more about world events at the time of past elections than it does about the political parties (see the next point). Over a typical four-year term, the benchmark averaged a nearly 57% return, with the Democrats maintaining an advantage.

2. Timing is everything

Digging a little deeper, two periods were responsible for the disappointing market performance under Republicans. Nixon and Ford were in office for the rapid inflation of the 1970s, the OPEC oil embargo, and the Watergate scandal that ended in Nixon's resignation. More recently, George W. Bush was elected just in time for the popping of the dot-com bubble and the 9/11 terrorist attacks, finishing his second term near the trough of the 2008-09 financial crisis. By contrast, Bill Clinton benefited from the inflating of the dot-com bubble, and Obama enjoyed the post-financial-crisis recovery in stock valuations.

3. Focus on the long term

Across nearly 72 years and 13 Presidential administrations, the S&P 500 turned $1 into $1,809—an 11% compound annual total return. Never mind the politicians: It's a testament to the creativity of our scientists and technologists, the drive of our workers and entrepreneurs, and the robustness of our democracy and free markets.

Bottom Line

There are 1,000 different factors that influence the direction of the stock market. No matter your political leanings, the person in the White House is only one of the 1,000. We encourage clients to express their political views at the ballot box rather than through their portfolios.

Disclosures

Moatiful is an independent publication of Trajan Wealth, L.L.C., an SEC registered investment advisor. The views expressed are solely those of the author, and may not reflect the views of Trajan Wealth. Nothing in this blog is intended as investment advice, nor is it an offer to buy or sell any security. Posts are for entertainment purposes only and should not be relied on when making investment decisions. Please consult your financial advisor for questions about your personal financial situation. All investments involve risk, including the potential for loss. Historical results may not be indicative of future performance. Data from third-party sources is not guaranteed to be accurate, timely, or complete. Links to external sources are provided for convenience only, and do not constitute an endorsement by Trajan Wealth. Clients and employees of Trajan Wealth may have a position in any of the securities mentioned. Data and opinions are subject to change at any time without notice.