close
close

Apre-salomemanzo

Breaking: Beyond Headlines!

US election results have little effect on stock returns
aecifo

US election results have little effect on stock returns

The performance of stocks, asset classes and sectors generally does not reflect a presidency

Article content

The ability to decipher real investment information from the noise is always the key to successful investing, but US presidential election represents an extraordinary challenge for investors. Filtering out what’s important from the chorus of vitriol and hyperbole seems more difficult than ever.

Today’s investors need to be especially impartial about politics, because the current race has attracted more attention than it deserves. The reality is that, historically, presidents have had relatively little impact on financial market returns. There may be a short-term market reaction to an election, but the long-term returns of stocks, asset classes and sectors generally do not reflect a presidency. The results are, in some cases, opposite to those implied by an amplified electoral campaign.

Advertisement 2

Article content

The stock market has generally performed quite well, regardless of who is in the White House. Since Jimmy Carter’s presidency, the S&P 500 has recorded double-digit annualized total returns in every presidential term except one. The S&P 500 even returned nearly 13 percent per year (about 3 percent real return per year) during Carter’s inflationary years.

The S&P 500 only had a negative annualized return during George W. Bush’s term. This occurrence of long-term negative returns coincided with the period following the bursting of the tech bubble. And the annualized return of the S&P 500 was identical (16.3 percent per year) under Barack Obama and Donald Trumppresidencies of the country, despite their radically different goals and policies.

Investors sometimes anticipate that a candidate’s proposed policies and regulatory framework will affect industry returns, but history once again suggests that presidents do not have as much influence over industries as is commonly believed. . In fact, sector returns are sometimes exactly the opposite of what was anticipated before the election.

For example, Trump disparaged the technology sector during his 2016 campaign and pushed to increase U.S. energy production. But technology proved to be the best performing sector under his administration and energy the worst. Joe Biden entered the White House with a focus on clean energy and other environmental, social and governance priorities. Yet energy, a sector dominated by traditional producers, has been the best performing sector of his term so far.

Article content

Advertisement 3

Article content

Likewise, election slogans had little to do with subsequent asset class returns. Five different asset classes had the best annualized returns over the eight presidential terms studied. Real assets, in particular, appear to outperform unpredictably rather than by policy prescription. Gold was the best performing asset class during the Carter and Bush mandates. Perhaps driven by supply chain disruptions caused by the pandemic, commodities have been the best performer under Biden.

Ironically, US small caps, more domestically focused, outperformed emerging markets during Clinton’s tenure, despite his globalist policies. U.S. multinationals and emerging markets also outperformed U.S. small caps under Trump’s presidency, even as he emphasized protectionism. Fundamentals, such as profits and valuation, proved more important than NAFTA (the North American Free Trade Agreement) or MAGA (the slogan Make America Great Again).

Fear-mongering political talk about the U.S. budget deficit and debt levels illustrates election noise that masks true investment prospects. Neither Democrats nor Republicans can claim any history of fiscal conservatism, despite the accusations made today. U.S. debt to GDP (gross domestic product) grew fastest under Ronald Reagan, exceeded 100% under Obama, and remained above 100% during the Trump and Biden administrations. Interest payments as a percentage of GDP are rising, but they were higher for 17 years, during the Reagan, Bush and Clinton years. Dire predictions that the United States might “run up the debt” seem to ignore that the United States did just that during the years when Lyndon B. Johnson, Richard Nixon, and Carter were in power.

Advertisement 4

Article content

One investment theme that could transcend politics is the deglobalization and reindustrialization of the U.S. economy. The theme of reindustrialization has dominated for a decade and both sides now appear to realize that the United States’ significant dependence on the rest of the world for the production of most goods has become a national security risk. . Domestic small- and mid-cap industrial stocks look attractive regardless of who wins the election.

Recommended by the editorial

Politicians love being in the spotlight and it’s a shame that investors watch their show. A consistent investment process, based on proven fundamentals, seems to be a good way for investors to stay calm, focused and able to ignore election news that is likely to produce little or no important market information.

© 2024 The Financial Times Ltd.

Article content