Investment Blog on Presidential Elections

Investment Blog on Presidential Elections

What is it about?

US Presidential Elections are just one month ahead of us. The President of the United States is one of the world’s most powerful people. The role includes the commander-in-chief of the world’s most expensive military and leading the nation with the largest economy by real and nominal GDP.


Does it matter?

The US President takes considerable influence on fiscal budget matters and government spending. Presidential candidates often have an economic agenda promoting or restricting certain companies or sectors in the US or economies abroad. Currently the US federal budget is nearly $4000 billion per year with a deficit of $474 billion. So yes, it certainly can matter if a few percentage points change or are redirected.


The US President can also take influence on the economic framework, in particular on foreign trade, environmental and social standards. Just think of guns, tobacco, health insurance, mortgage and banking.


For research of the historic link between stock market returns and presidential elections – see below!


Expectations on Hillary Clinton and Donald Trump

Currently we already have great uncertainty about who wins 2016 elections. According to latest average polls Clinton is expected to get 48% and Trump 44%. Although the vast majority of polls sees Clinton ahead, Trump’s lack of an economic agenda is adding further uncertainty. Trump should be bad for multinational stocks since he wants to impose tariffs on international trade. And Trump could good for guns, defense and prisons according to his campaign. Gary Johnson (Libertian Party) and Jil Stein (Green Party) have virtually no chance to win any single state.


Clinton is said to be bad for banks by imposing stricter regulation. Consumer discretionary stocks would benefit from lower taxes for middle-class incomes and increased minimum wages. She is promoting a $275 billion infrastructure plan and respective companies. While she would probably support healthcare service companies by expanding „Obamacare” she has been campaigning for lower drug prices which could depress pharma profits.


Historic Statistics of Presidents and Stock Markets

Let’s take a look at what historic data prove right or wrong. The general idea that the Republicans are the party of business and the Democrats are the party of labor is actually wide of the mark. At least when comparing to stock markets returns. In election cycles since World War II, the Dow Jones has posted bigger average returns under Democratic presidents. The only two presidents with negative average annual returns during their tenure are both Republicans — Nixon (-5.1%) and George W. Bush (-4.6%).


There is more research on whether White House, Senate and Congress are from the same party or divided since 1928 – suggesting poor returns when Senate and White house are divided. However this has proven quite the opposite for recent years.


The presidential cycle shows strongest markets returns in the year before the election, the second best returns in the year of the election and weakest performance during first and second year of presidency (Dow Jones since 1833). However, these are just average numbers. The Dow Jones index just lost a record level of 34% in Obamas first election year in 2008!


On the sector level there is little research and many counterintuitive examples. Just think of 2004 when oil man Bush had been elected and the renewable energy sector outperformed markets for the three following years.


So overall we do see nothing much in the average numbers from rather small samples. And even if we did found any statistically reliable relationship we would not be sure about the causation: if presidency drives the economy or the opposite way is true.


How to Invest

Erwin Lasshofer and his INNOVATIS team know that presidential elections are no good driver for your investment portfolio. Investors should better follow their long-term investment strategy. Of course there is some uncertainty in the markets caused by coming up US elections. This is mainly caused by the uncertain outcome and because Donald Trump potential action as president is so hard to judge.


Uncertainty causes volatility and we take advantage of it. This way our clients benefit from higher coupons and lower instrument prices. Our investment strategy is driven by systematic discipline and continuous monitoring. The easiest access to full service with full control for clients to it is our Managed Account.


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