Republicans believe Joe Biden winning will whack stocks. Democrats presume re-electing Donald Trump is double trouble. A clear secret: they’re both wrong. The S&P 500 typically shines in presidential election years regardless, rising 83% of the time, averaging 11% returns in back-end loaded fashion. This year, while unusual, is headed toward normal back half strength.
Last month I
detailed
how technology made data universally accessible, erasing any edge it gave. Instead I suggested seeking relationships that quants, academics and data devotees dismiss from bias. Politics fits perfectly. Precious few folks ever get past their ideology. Fewer flip-flop their ideological rudder—and if they do, most only once per lifetime.
Arguing with people about politics is worse than pointless. Most everyone is politically “stuck”—hence blind to market outcomes and relationships that defy their world view—confirmation bias at work. That gives some political history real stock market power.
Most investors, roughly about 70%, see Democrats as bad for business and Republicans as good. I’m not saying that is right or wrong—just common perception, reinforced by campaigning. Democrats usually run on higher public spending, income redistribution and tighter regulations.
Hence, the anti-business—bad for stocks—image. Republicans normally run on freer markets and lower taxes, seemingly business friendly. Reality isn’t so simple. Both parties pass laws markets like and hate—of widely varied forms with widely varied consequences. Crucially, stocks have done fine (and poorly) under both.
But conventional images shape sentiment, affecting the timing of election and inaugural year returns. When a Democrat has won, investor fears dampen election-year returns—just 7.4% on average in the S&P 500’’s life. When Republicans won, higher hopes boosted election-year averages to 15.2%. But inaugural years flip-flop that. Democrat inaugural years are great and Republican ones lesser.
Presidents never get as much done as they promised. Perceived anti-business Democrats accomplish less than feared—a positive surprise generating big, 16.2% average returns in their first year. Only one Democrat’s inaugural year since FDR wasn’t double digit positive—Jimmy Carter’s, (a -7.4% loss).
The reverse holds for Republican presidents. High hopes for pro-business policies fade as less materializes. Stocks average just 2.6% in their first years. Of course, Trump was unusual, given 2017’s 21.8% whopper. But that makes perfect sense given how his unconventional style and tariff talk freaked 2016 investors. Markets treated him much like a Democrat. That won’t repeat.
Stocks disregard absolute uncertainty, but hate rising uncertainty and love falling uncertainty—always. Falling uncertainty typically boosts stocks as election years progress. Early on, uncertainty increases as primaries force aspirants to extremes to court their bases. 2020’s Democratic primary was a textbook example. That early growing uncertainty saps returns. Stocks’ median return in election years’ first halves is just 1.1%. This year’s -4% isn’t far off—even with COVID’s bear market.
But now we know either Biden or Trump wins. Biden just released initial policy proposals, which helps shape investor expectations—adding some clarity. Soon we learn how good each campaign is at mobilizing voters, particularly digitally given COVID. More clarity. Each step lowers uncertainty, boosting stocks as November nears.
Pundits claim Biden’s 9-point polling lead means Trump is finished. Plus they cite weakness from features like his July demotion of campaign manager Brad Parscale. Or splintered GOP insider support—like former Ohio governor John Kasich endorsing Biden at the Democratic Convention.
Investors fear this election is different, fearing a Biden landslide brings radical policies markets can’t handle. Maybe! But this is always the fear. As Sir John Templeton famously said, “This time it’s different” are investing’s four most dangerous words.
A Biden victory is premature. Parallels with 2016 are eerie. That summer, Trump trailed Hillary Clinton by 8 percentage points in national polls. That June, Trump reshuffled his campaign leadership, ousting
Corey Lewandowski. He did it again that August. GOP “Never Trumpers” then sought to defeat him. Sen. Ted Cruz spoke but, sarcastically, refused to endorse Trump at the Republican convention. Pundits pontificated Trump couldn’t win. But he did by winning swing states narrowly.
Will he again? I have no clue. Trump isn’t sneaking up on swing-state Democrats this time. While Biden’s war chest is bulging, Clinton hugely out-spent Trump. Trump’s fundraising is super-strong this time. Almost no 2016 GOP members of Congress endorsed Trump; Now almost all do.
An amazing trivia secret: Democrats haven’t won the presidency once since the Civil War with any candidate thought likely to be the next nominee four years earlier, unless already the President somehow.
Never, ever! Biden is archetypal of what they always lost with—an old warhorse. They’ve won with previously unexpected names: Grover Cleveland, Woodrow Wilson, FDR, JFK, Jimmy Carter, Bill Clinton and....Barack Obama—unexpected relative blank-slate personas to generate enthusiasm and turnout among youthful voters.
Regardless, we get either a re-elected Republican or newly elected Democrat—both bullish for 2020 and 2021. Over election and inaugural years, re-elected Republicans have averaged 13.1%—with most gains coming early. Newly elected Democrats average 15.9%, driven by big inaugural years. It should be a good time for stocks.
Politics, of course, isn’t the only stock market force this or any year. But because confirmation bias blinds so many to the forces detailed above they have unusual power—take advantage of them.
The U.S. economy saw the biggest quarterly plunge in activity ever, though the plummet in the second quarter wasn’t as bad as feared.
Gross domestic product from April to June plunged 32.9% on an annualized basis, according to the Commerce Department’s first reading on the data released Thursday. Economists surveyed by Dow Jones had been looking for a drop of 34.7%.
Still, it was the worst drop ever, with the closest previously coming in mid-1921.
The report “just highlights how deep and dark the hole is that the economy cratered into in Q2,” said Mark Zandi, chief economist at Moody’s Analytics. “It’s a very deep and dark hole and we’re coming out of it, but it’ going to take a long time to get out.”
The report comes amid a recession that began in February and pulled first-quarter growth down 5%. On a quarterly basis, the Q2 decline was 1.8%.
Sharp contractions in personal consumption, exports, inventories, investment and spending by state and local governments converged to bring down GDP, which is the combined tally of all goods and services produced during the period.
Personal consumption, which historically has accounted for about two-thirds of all activity in the U.S., subtracted 25% from the Q2 total, with services accounting for nearly all that drop.
Spending slid in health care and goods such as clothing and footwear. Inventory investment drops were led by motor vehicle dealers, while equipment spending and new family housing took hits when it came to investment.
Prices for domestic purchases, a key inflation indicator, fell 1.5% for the period, compared with a 1.4% increase in the first quarter when GDP fell 5%, The personal consumption expenditures price index dropped 1.9% after rising a tepid 1.3% in Q1. Excluding food and energy, the “core” PCE prices were off 1.1%.
However, personal income soared, thanks in large part to government transfer payments associated with the coronavirus pandemic. Current-dollar personal income rose more than six-fold to $1.39 trillion, while disposable personal income shot up 42.1% to $1.53 trillion.
Despite the rise, personal outlays tumbled by $1.57 trillion, due in large part to a drop in services spending.
Historical perspective
“Bottom line, the numbers of course are alarming but all self inflicted with about half the quarter reflecting almost full shutdown and the other half the slow reopening,” said Peter Boockvar, chief investment officer at the Bleakley Advisory Group. “That said, it does reflect the hole out of which we now need to climb out of as we rebound in Q3 and Q4.”
Neither the Great Depression nor the Great Recession nor any of the more than three dozen economic slumps over the past two centuries have ever caused such a sharp drain over so short a period of time.
By comparison, the worst quarter during the financial crisis of 2008 was the 8.4% GDP drop in the fourth quarter of that year. The previous low-water mark was a 10% slide in the first quarter of 1958, while the worst in recorded history came in Q2 of 1921.
This particular tumble in activity owes to a different source than any of its predecessors: a government-induced shutdown aimed at combating a pandemic.
Workers across the country were told to stay home from any job not considered essential, resulting in a crushing halt that saw the unemployment rate peak at 14.7%, a post-Depression high. The National Bureau of Economic Research said the current recession actually started in February, a month before the pandemic declaration. First-quarter GDP fell 5%.
Although it was roughly in line with expectations, it was the 19th straight week in which initial claims totaled at least 1 million and the second consecutive week in which initial claims rose after declining for 15 straight weeks.
