Myths of How Markets are Impacted by the Election
Pre-Election Investment Discussions
It’s not often that an investment advisor can use the word “guaranteed.” However, lately it seems that it is guaranteed I will be asked in our client quarterly review meetings, “Should I get out of the market before the election?” In past elections, this question is usually good fodder for a prediction and to discuss what effect a particular Presidential nominee will have on the economy. This year seems to be different. People are a little skittish and I don’t blame them for being a little concerned about how this election is playing out – scandals and lies and rhetoric… oh MY!
Markets and Elections: Statistically Speaking
While the rhetoric on both sides certainly adds another layer of uncertainty to the markets; the bottom line is that statistics show there is very little correlation to which party ends up in the White House and how markets perform. According to CNBC, between May and October of an election year, the S&P has rallied 19 of the last 22 elections (or 86% of the time) with an average gain of 6.2% regardless of which party won. One twist for this statistic is that for election years in which there was no incumbent, the S&P lost 4% on average.
What is probably a little bit more indicative of how the market will react is to look at who controls congress. According to research provided by Brian Belski of BMO, when Republicans controlled congress the S&P typically averages a gain of about 19.7%, vs. an average gain of 7.6% with a split congress and 3.2% when Democrats are in control. As we head to the voting booths in November, we are in an election year with no incumbent and a Republican-controlled congress. Don’t forget about the possibility of a “relief rally!” Typically the year AFTER a new president takes over, the markets rise about 6%.
In the end, how stocks perform in an election year may have less to do with the party of the candidate elected than the underlying economy that will pave the road for future years. Our advice, even if you are deeply devoted to one party or another, is to divorce your investment portfolio from your politics.
There are larger forces that will dominate how markets will act in the upcoming years and it is mostly economy, economy, economy. The best way to play an election is to focus on long-term trends that will play themselves out no matter who is in the White House. Some of these trends for example; are cloud computing, digital evolution and health care. The Baby boomers alone represents a $15 Trillion economy creating a push/pull for supply and demand for entertainment, long term care and hospitality.
If you want to have some fun though, here is a list of potential stock winners as predicted by ISI to reap rewards by outcome:
- GE – Trade/Green Technologies
- DE – Trade, including in AG
- MON –Trade including in AG, IPR
- NKE –Trade
- TSLA –Auto/Green tech
- HCA – Affordable Care Act stays
- CHS – Affordable Care Act stays
- GOOGL – IPR/Trade, Broadband policy, immigration/skilled workers
- AAPL – IPR/Trade, Immigration/Skilled workers
- NFLX – Continue Obama policies on broadband regulation and access
- F – Anti-TPP
- KO – Less health regulation
- MO – Less tobacco regulation
- XOM – Favor fossil fuels
- SLB – Favor fossil fuels
- NRG – Fossil Fuels, less environmental regulation
- C – Less financial regulation
- PFE – Less price regulation, corporate tax reform, repatriation
- GILD – Less price regulation, corporate tax reform
- CXW – Tougher on crime, detention of migrants
- VZ – Pro incumbent telcos and wireless
Author: Kelly Pedersen