“I despise all adjectives that try to describe people as liberal or conservative, rightist or leftist, as long as they stay in the useful part of the road.”
- Dwight Eisenhower
In WhartonHill’s year-end recap and 2019 outlook, we explored the current economic and stock market environment, and laid out the case for why we thought the volatility experienced in December was overdone. In short, our forecast for future growth was more optimistic than stock market action last year dwould seem to indicate. After a strong start to the year, with the S&P 500 returning 8% in January, we decided this month’s edition of Viewpoints should take on a lighter subject: politics.
All joking aside, there has been no shortage of attention paid to the current political climate, with debates over trade, immigration, government shutdowns, green energy, and anything else one can think of, occurring simultaneously at center stage. We are often asked by our clients how the current political climate is affecting our outlook for the markets, and whether a shift in political parties, from Republicans to Democrats, or vice versa, should cause us to reconsider portfolio positioning. In short, we take all outside factors into consideration when considering the direction of markets, but at a 30,000 foot view, the makeup of parties in Congress and the Presidency has shown little bearing on how the market fared in the days or years after an election.
Returns have generally been positive whether Congress was split or in single party control, by either party. 1990 and 1994 both saw returns of over 20% when Congress was controlled by the Democrats in the former, then the Republicans in the latter. Perhaps a more interesting stat than how the market behaves when one party gains control is how stock market returns shake out in the third year of a presidential cycle.
On average, stocks return around 9% in a given calendar year. In the first, second, and fourth years of a presidential term, the market has returned just under 7%. In the third year of a presidential term, the market has returned 16%, on average.
Also, in the third year of a presidential term, the market has generated a positive return 88.2% of the time. Why does the market tend to perform well in the penultimate year of a presidential term? Well, if there’s one thing we know about politicians, it is that they will promise to do whatever they can to get elected. The last few weeks have shown a slate of Democratic hopefuls put their hat in the ring and begin their campaign push, with a number of government spending programs proposed.
President Trump has also started to campaign as well and has even shifted his rhetoric on major areas like trade and the government shutdown. Last December, in a notably hostile tone, Trump proclaimed himself as “Tariff Man” in his trade war negotiations with China. Now, he wants to have President Xi come to Mar-A-Lago and put the trade dispute behind him. On the shutdown, after proclaiming that he would keep the shutdown going “for months or even years” if he did not get the money for the wall, Trump ceded that ground to Democrats and signed a bill to fund the government after reconsidering the ripple effects occurring in the country. Regardless of who is in power, those making the pitch to the American people know that money talks and when American’s feel better off, they will vote for the party in office or, conversely, if they feel that we are headed in the wrong direction, will swing the other way. In a campaign year, it is in both parties’ best interest to “stay in the useful part of the road”, which Eisenhower championed, and make proposals for economic growth.
Of course, the economy and market will not be on auto-pilot from here through the rest of the year. Economic trends are bigger than campaign promises, and the Federal Reserve, a key arbiter in lending and credit markets, has shown itself to be independent of political posturing from either party. Fortunately, major areas of the economy, including the jobs market and consumer spending, have shown themselves to be resilient. Recent data showed the economy added 305,000 jobs in the month of January in spite of the government shutdown. Though earnings reports have been soft to start the year, companies are coming off three quarters of earnings growth above 20%. The pace of growth was bound to decelerate at some point. As the year progresses, we will continue to monitor economic trends and the health of the economy as the year progresses, with an eye towards the promises made by Presidential hopefuls as well as President Trump.
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The opinions voiced in this material are for general information only and are not intended to provide specific investment advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
All data via Barron’s, Bloomberg, and Schaeffer’s Research