Harold Wilson, former UK Prime Minster, comment ---- “A week is a long time in politics” --- underscores the rapid and often dramatic changes that can occur in the political landscape within a fleeting period. The idea that political fortunes, public opinion, and circumstances can shift significantly in just a weak, making prediction and strategies quickly outdated and obsolete.
The current political rhetoric surrounding the upcoming US election and implications on financial market risk and behavior implies --- with Trump’s re-election odds an increase in US bond market volatility, a decreasing equity market volatility and a boost to stock prices with reduced energy price scenario. With Biden stepping down and the Democratic party sorting out its house --- the likely policy trend would focus on income inequality, healthcare, climate change, education, and criminal justice reform. Some of these policy directions are not necessarily negative for markets --- as market reaction depend on the balance of these factors and how they align with broader economic conditions and investor expectations. Besides the presidency, a more relevant question on the possible ramifications include --- who will dominate Senate and Congress with the newly elected President? Yes, a week is a long time in politics.
Nevertheless, historical data suggests, real as well as perceived, that economic and inflation trends, more so than election outcomes, tend to have a stronger, more consistent relationship with market returns.
The US Federal Reserve Chair typically has more immediate and direct influence over financial markets due to the control of monetary policy. In contrast, the President has broader but often more diffused influence over the long-term economic environment through fiscal policy, regulation, and trade – which by their very nature may imply some immediate impact but policy can and does protract over several administrations. Both roles are essential and interdependent, with their influence varying depending on the specific economic context and challenges faced.
Regardless of party affiliations, politicians would love to have the Central Banker’s under their control. US politicians of both stripes are no exception. And why? An appropriate analogy --- “Run amuck like children in a Candy Store” --- where short-term focus rains, fiscal discipline is at best marginal and longer-term economic consequences are for the most part ignored, vs, objective decision-making, inflation control, employment, economic stability and credibility and trust. Central Bankers are human and therefore imperfect, yet their salient focus is maintaining monetary and financial stability while ensuring that the financial system operates in the best interest of consumers and the wider economy.
A striking recent lesson in Turkey --- where President Tayyip Erdogan --- eroded central bank independence. Raising concerns among economists and investors, --- leading to increased volatility in the Turkish lira and broader economic instability. This situation highlights the potential risks associated with bringing a central bank under direct political control, including loss of investor confidence and challenges in effectively managing inflation and economic stability.
The past one hundred years can provide us with some clues as to the potential implications of the upcoming election on markets and the economy.
Let us take a brief walk through a Century of Market Behavior in Presidential Election Years.
Understanding how elections have historically influenced the stock market can help us navigate the uncertainties of this election year.
1920s and 1930s: Market Crashes and Recoveries
- 1928 Election (Hoover vs. Smith):
The market rallied before the election, but the onset of the Great Depression soon after Hoover's victory led to a prolonged bear market.
- 1932 Election (Roosevelt vs. Hoover):
Roosevelt’s victory and New Deal policies sparked a recovery from the Great Depression lows.
- 1936 Election (Roosevelt re-election):
Despite controversy over his policies, Roosevelt's re-election brought stability and growth.
1940s: WWII and Economic Stability
- 1940 Election (Roosevelt vs. Willkie): With WWII influencing economic policies more than the election, the market remained stable.
- 1948 Election (Truman vs. Dewey): Truman’s unexpected victory initially caused market jitters but was followed by a strong rally.
1950s: Post-War Economic Boom
- 1952 Election (Eisenhower vs. Stevenson): Eisenhower’s win brought optimism, leading to a market rally driven by expectations of strong economic growth.
- 1956 Election (Eisenhower re-election): Continued economic expansion kept the market strong.
1960s: The Kennedy and Johnson Years
- 1960 Election (Kennedy vs. Nixon): Market volatility reflected uncertainty about Kennedy’s policies but eventually stabilized.
- 1964 Election (Johnson vs. Goldwater): Johnson’s win led to a market rally, driven by expectations of continued economic growth and stability.
1970s: Political Scandals and Oil Crises
- 1972 Election (Nixon re-election): The market initially responded well to Nixon's re-election, but the Watergate scandal and oil crisis led to significant downturns.
- 1976 Election (Carter vs. Ford): Carter’s victory brought uncertainty, resulting in a volatile market.
1980s: The Reagan Revolution
- 1980 Election (Reagan vs. Carter): Reagan’s victory led to a significant market rally, driven by expectations of deregulation and tax cuts.
- 1984 Election (Reagan re-election): The market continued its upward trend, reflecting strong economic performance.
1990s: Technological Advancements and Economic Prosperity
- 1992 Election (Clinton vs. Bush): Clinton’s victory led to initial uncertainty, but the market performed well during his presidency, benefiting from technological advancements and economic policies.
- 1996 Election (Clinton re-election): The market continued to perform strongly, driven by a booming economy.
2000s: Tech Bubbles and Financial Crises
- 2000 Election (Bush vs. Gore): The contested election led to significant market volatility, followed by the bursting of the dot-com bubble.
- 2004 Election (Bush re-election): The market responded positively to Bush’s re-election, with a focus on tax cuts and defense spending.
- 2008 Election (Obama vs. McCain): The financial crisis overshadowed the election, with markets reacting more to economic policies than the election itself.
- 2012 Election (Obama re-election): The market was stable, with modest gains reflecting steady economic recovery.
2010s: Post-Recession Recovery
- 2016 Election (Trump vs. Clinton): Trump’s unexpected victory led to a market rally, driven by expectations of tax cuts and deregulation.
2020s: Pandemics and Political Polarization
- 2020 Election (Biden vs. Trump): The market was initially volatile, but responded positively to Biden’s victory, with expectations of fiscal stimulus and stable policies.
Taking out the daily media noise ---what does the current political rhetoric tell us about each side?
Potential Democratic Candidate’s Policies:
- Infrastructure and Green Energy: Like Biden, a younger Democratic candidate might focus on infrastructure spending and green energy initiatives, which could benefit sectors such as construction, renewable energy, and technology.
- Regulation and Taxes: Increasing corporate taxes and tightening regulations could create headwinds for certain industries, particularly finance and energy.
- Healthcare and Social Policies: Continued support for healthcare reforms and social policies could positively impact the healthcare sector.
- Innovation and Technology: A younger candidate might emphasize technological innovation and digital infrastructure, potentially benefiting tech and related sectors.
Potential Donald Trump’s Policies with JD Vance as Running Mate:
- Tax Cuts and Deregulation: Trump’s platform is likely to include further tax cuts and deregulation, which could boost corporate profits and stock market performance, especially in traditional energy and financial sectors.
- Trade and Manufacturing: Emphasis on trade protectionism and bringing manufacturing jobs back to the U.S. could influence sectors like manufacturing and technology.
- Defense and Security: Increased defense spending would benefit defense contractors and related industries.
- JD Vance’s Influence: Known for his populist economic views, Vance could push for policies that address economic inequality and support for working-class Americans, potentially influencing sectors like manufacturing, healthcare, and infrastructure.
Investment Strategies During Election Years --- All Assets Classes --- Think like a Pension Pool
- Diversification: Maintaining a diversified portfolio can help manage the risk associated with election-year volatility.
- Sector Allocation: Allocating investments based on sectors expected to benefit from the winning candidate’s policies can be advantageous. Looking for and seizing longer-term trends rather than immediate rush to buy always wins out.
- Long-Term Perspective: Despite short-term volatility, maintaining a long-term investment perspective can help avoid overreacting to temporary market swings.
In Conclusion – Learning from the past to improve the future
In summary, presidential elections are historically characterized by increased market volatility and significant impacts on various sectors depending on the candidates’ policies. As we approach the 2024 election, understanding the policy platforms of a potential Democratic candidates and the Trump-Vance ticket may provide insights into potential market movements. By studying historical patterns and adopting strategic investment approaches, investors can better navigate the uncertainties and opportunities that election years present.
Market uncertainty and the unknown are not just challenges but also the heartbeat of financial markets, pulsating with the promise of unexpected opportunities. While geopolitical events, elections, economic data releases, and surprise corporate earning can stir volatility and shake investor confidence, they also create moments ripe for seizing potential gains. Embracing uncertainty, they find opportunities hidden within the chaos, transforming potential risk into steppingstones toward long-term success. In this dance uncertainty is not just a hurdle --- it is a chance to thrive and grow.
A lesson from a more recent event --- when President Obama took office in January 2009, post Financial Crisis and amidst the Great Recession, the US stock market began its recovery from a March low, driven by investor confidence in the government’s response. The $787 billion American Recovery and Reinvestment Act, alongside TARP, stabilized the banking sector and restored market confidence. The Dodd-Frank Act introduced significant financial regulatory reforms, ensuring grater market transparency and consumer protection. This period market the beginning of a prolonged economic expansion, characterized by job growth, rising corporate profits, and increased consumer spending, with positive ripple effects globally.
John
July 2024