The Election Effect: Part 1 of 3 – Which Political Party is Better for S&P Returns?September 22nd
With the presidential election only 41 days away, our team at Acumen has been researching a variety of topics relating to the potential impacts of the election and we are sharing this information with you in a three-part series called “The Election Effect.” In today’s first installment, we explore the historical impacts each political party has had on S&P returns. In the upcoming weeks, we will explore additional topics including the tax plans and policies along with their implications for each candidate. We hope you find this information interesting and welcome your thoughts on the series.
The Election Effect: Part 1 of 3
Is the Republican or Democratic party better for S&P returns?
Donald Trump surprised the world and, briefly, the financial markets when he overcame a large polling deficit to defeat Hillary Clinton and become the President of the United States. By historical polling standards, Clinton had close to an almost insurmountable lead and many wrote off the Republican Party’s chances for gaining back control of the White House. What happened in the Futures Market late on election night and in the early hours of the next morning was a spectacle. From the candlestick chart below, we can see that the S&P 500 Index Futures Prices fell suddenly more than 5% when it became clear Trump would become the next President of the United States. The massive line down on November 9th shows the lowest point that S&P 500 futures prices got, but the highest point of the clear box shows where they closed. Prices quickly corrected and the market opened higher than the previous afternoon’s close, and then rallied 4.5% over the next two months. We believe the sudden drop in the Futures Market seen on election night in 2016 is a direct result of the anxiety low probability events, or uncertain outcomes, bring the market. In the short run, the market is like a voting machine – where investors display the popular belief in price action. When the popular belief is suddenly disproven or put to a test, financial markets display volatility. In the long run, the market is more like a weighing machine; the actual substance of market-moving factors is displayed in the price of assets. These factors were even seen in live action to a degree on election night. After the immediate drop we saw in the market, we then observed investors begin discounting the prior written-off pro-business policy implications of a Trump presidency.
After the 50% rally in equity prices this year, the past few weeks have displayed a much slower or volatile path ahead. We believe this is more a result of the uncertainty of the future election and future policies on both sides of the aisle, and less a result of a possible “blue wave”. Below is a candlestick chart of the S&P 500 Futures Price. The massive line down on the 9th displays at one point the S&P 500 Futures Price was below 2050 when Trump was announced. In the chart, a blue box indicates the close was lower than the previous days close signifying a down day. A clear box indicates the days close was higher than the previous days close. The ends of the sticks represent the range of prices with the highest part of the stick being the intraday high and the lowest being the intraday low.
There is sometimes a common misconception one political party is better for the stock market than the other. However, from a historical perspective, there really is not a clear winner. Since 1953, three Republican party presidents have produced an average annualized return in the S&P 500 of 10% or more during their tenure. The Democratic party has produced two candidates with an average annualized return of 10% or more since 1953. During the same time frame, the Democratic party has a higher average annualized rate of return in the S&P 500 of 10%, compared to the previous five Republican presidents averaging an annualized return of 5.79%. The Democratic party has also produced an average annualized return of greater than 5% during each of their four stints in office since 1953. The large difference is likely a result of the two previous bear markets occurring during Republican party terms, which is also displayed by the higher average annualized standard deviation from the S&P 500 during Republican terms – 14.97% versus the Democrat’s average of 13.52%.
One of the biggest concerns of investors right now is the idea of possible negative effects on returns from increased taxes and regulation if the Democratic Party gains control of the White House and Congress. However, our research shows the average annualized rate of return for the S&P 500 during periods of a one-party controlled White House and Congress are much higher than when it is split – with returns slightly favoring Democrats. To us, market returns and volatility can be arranged a thousand different ways to frame a believed correlation. But, overall, there is not a clear-cut picture of any party with a more positive effect on market prices.
Shown above is a study of 88 years of returns for the S&P 500. The colors of each data point represent the party controlling the White House during that year. The blue line through the middle represents a trend line staying relatively stagnant. From here, we see close to no correlation between the party controlling the White House, and yearly returns of the stock market. The exact correlation is approximately 10%. Many investors believe the most important event for Future Market returns, when factoring in the presidency, is Red or Blue. However, we like to look past this singular factor, as our research shows the correlation between the party controlling the White House and Future Market returns is almost absent. The uncertainty surrounding future policy as well as policy implications themselves are the most important factors from the data we have analyzed.
We attempt to steer clear of making guesses about who WILL BE the next President of the United States, and instead observe the most likely policy responses from both parties and position portfolios accordingly to the most probabilistic outcome. However, if history tells us anything, it is incumbents have a hard time finding themselves in the Oval Office again when there has been a recession within the two years leading up to the election itself.
Our research finds no correlation between specific party control of the White House and asset returns. For this reason, we do not anticipate on making asset allocation decisions based on any party winning the 2020 election. Instead, we believe the long run weighing mechanism of the market will discount the most probabilistic policy outcomes no matter what party controls the White House.
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Information used in this commentary was obtained via Bloomberg L.P.
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The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The S&P 500 Index focuses on the large-cap segment of the market; however, since it includes a significant portion of the total value of the market, it also represents the market.
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