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Will This Vote Follow the Historical Trend?

November 3, 2016, 6:00 am

Matt and I hope you enjoyed Tuesday’s kick-off to our special election series! (If you missed it, you can check it out here.) We have a lot more in store for you leading into and continuing after the November 8 vote, so let’s get right to today’s topic.

In our last bulletin, we talked about polls and predictions. This time, let’s talk about what history can tell us about what’s ahead for the market. Even going back decades, it actually shows what we mentioned last time: It doesn’t really matter who wins.

Ultimately, stocks will trade on a variety of factors with politics generally falling toward the bottom of the list. But there are still some interesting patterns to consider. Historians have looked at the market and the presidential election from a variety of perspectives: incumbent vs. new blood, a unified vs. divided Congress, party vs. party and more.

The thinking is often that Republican candidates are more pro-business, but over the last 70 years, stocks have actually done better under Democrats (average annual gain 9.7%) than Republicans (average annual gain 6.7%). The market has been down under only two presidents in that time, Richard Nixon and George W. Bush. Nixon was impacted by the energy crisis of the 1970s and Bush was finishing his second term when the financial crisis and recession hit.

The Presidential Cycle: Election Year Performance

It’s also interesting to consider market performance in each year of an election cycle. Going back to 1950, the last year of the cycle (the election year) has been good for stocks with the S&P 500 rising 81% of the time with an average gain of 6.6% – and that includes the 2008 election year when the S&P dropped 37%.

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So will this election follow the historical trend? There’s no question that this presidential race has been anything but normal, and Wall Street has felt the impact. However, the S&P 500 is still up 3.3% on the year despite what was an unusually flat September and October, and we’re seeing some last-minute nervousness as the polls show a close race with less than a week to go. Still, we keep coming back to our original answer: other factors are going to have more influence on stocks than who is in the White House. There are still some speed bumps ahead – including the conclusion of earnings season and the Federal Reserve’s highly-anticipated December meeting that could include a rate hike – but I don’t see any of these concerns wiping out the year’s gains. In fact, we could see that number rise by the time we ring in 2017.

Economic Indicators

Others argue that the stock market’s performance before an election is an indicator of the health of the economy, which may well be the biggest factor in the election. Remember, James Carville’s “It’s the economy, stupid” became a catch phrase during Bill Clinton’s 1992 campaign. Whether you liked Bill Clinton or not, that part was true. And it came into play as stocks rebounded after bottoming in 2009 – not because President Obama was elected but because the economy started to recover.

Voting patterns historically follow economic confidence. When Main Street is performing well, the incumbent party tends to win at a rate of 4-to-1; otherwise, more people vote for change. Both candidates have used this messaging in their campaigns, with Trump dwelling on the downside while Clinton skews positive.

Right now, consumers seem to be in a good place. From the top-line retail sales data and the job creation numbers to the specifics of corporate earnings and stock performance, the market we’re in suggests that for a significant majority of the population, the world feels at least a little better than it did even a few years ago. Those are the indicators institutional investors accept and rely on, so the Big Money is weighted toward a cheerful consumer.

The Federal Reserve is on the same page. While the numbers aren’t perfect, Fed Chair Janet Yellen and her fellow government bankers have the closest thing around to an official top-down view of the economy. They’re convinced that the job market and household spending keep getting better, to the point where short-term interest rates can actually nudge off the bottom for the first time in eight years. Whether that view translates into sustainable GDP growth or not, as far as the Fed can see, a lot of households are in better shape now than they have been in nearly a decade.

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As you can see on the graph above, we’re coming out of a GDP slowdown and got a nice jump from 1.4% in Q2 to 2.9% in Q3. Now that’s still an early number that’s likely to see some revisions, but the economy’s slow improvement with GDP in the 2%-3% range is a good sign regardless of who wins. Earnings are on pace to come in positive for the first time since the fourth quarter of 2014 and more growth is expected in 2017 – that’s the ultimate fuel for stocks and a big story we’ll be watching next year.

And if Wall Street itself is signaling good times ahead no matter how the ballots land, hanging back on the sidelines is the only guaranteed way to lose. Once you’re committed to staying in the game, the question shifts to which areas of the economy are ready to shine brightest.

We’ll talk more about that in our next bulletin, so stay tuned!

 

3 comments

  1. Very informative. Thank you Hilary!

    Comment by Michael on November 3, 2016 at 9:55 pm
  2. I am thinking to put 50 % of my 401 K portfolio in cash on Monday. I am 100% stock at this time. If market corrects Election Day I can buy low. Or should I sit tight. Any thoughts. Not your member yet but thinking to join.

    Comment by Amer on November 6, 2016 at 4:31 am
  3. Excellent review of the situation without making it a long-winded treatise. And even better, no ending in a requirement to purchase some other subscription in order to get the conclusion and way forward.

    Comment by Ron Holdway on November 9, 2016 at 10:16 pm

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