Election Season
Historical market data shows that there’s no discernible pattern that ties market returns to whether a Democrat or Republican won the elections.
Instead of worrying about the election’s impact, it’s more useful to rule out unsystematic risks through broad diversification (like in our core portfolios), and have an overarching risk management overlay (like our Risk Matrix) to take into account the relevant datapoints that influence markets the most.
Bad officials are elected by good citizens who do not vote.
— George Jean Nathan
With around 10 days to the US Presidential Elections, we are starting to see more news about it. So far it has not been as contentious as expected but things can quickly change. Incumbent President Biden's decision not to run for another four years so late into the re-election campaign was shocking, but there's been a long history of other presidents who've also bowed out on a chance at four more years. With him dropping out, his current Vice-President has been catapulted to the front. Who will win? At the moment, current betting odds favour a Donald Trump win over Kamala Harris.
Although Trump has been convicted of some crimes, there is nothing in the US Constitution which prevents a felon from running from President (...and neither is he the first). However, if he does win, he would be the first to become a US President.
Typically the risk of re-election for the incumbent politician in power has traditionally been a stock market collapse. However, things appear to be shifting. A recent survey released showed that although there had been greater participation by Americans in owning the stock market, 10% of the richest households still owned the majority of the stocks. As such, a good bulk of the population today is unlikely to be affected very much by how the stock market performs.
As such, the economy would likely be the biggest stumbling block for re-election prospects — perhaps then it is no surprise that the current administration is doing all it can to ensure a soft landing for the economy.
An economic slowdown has broad impact because people lose jobs, property prices fall, consumption activity dries up, and businesses fail. That’s when people become angry at politicians.
But at the moment stocks are doing well and the Federal Reserve looks to have pulled the proverbial rabbit out of the hat. So, what are the chances of a smooth transition to the new Democratic leadership?
Unfortunately, it appears that Harris, being a woman, has an uphill battle to climb in the presidential race — recent surveys allude to this.
So if Trump is going to be President again, should we be getting worried about him creating more tensions with the rest of the world, especially China, and how are markets going to react?
Let’s Look at The Data
The chart below stacks up the monthly returns of the US market from 1926 to mid-2020, almost a century of historical data. You can see that there have been months with large drops of more than -20%, and also months with large gains of more than +20%. The bulk of the returns fall between -4% to +5%.
The coloured bars denote when a Republican (red) or Democrat (blue) won the presidential contest. Can you spot a discernible pattern? We certainly can’t. The conclusion here is that there have been both good and bad months whether a Democrat or Republican won.
Data compiled by Vanguard also shows that there is actually no pattern as to which party is better for markets (chart below).
As such, the election is better viewed more from an entertainment perspective and not so much potential material for a forecast — try to avoid worrying too much about how your portfolio will do in response to it. Be mindful that investment themes and predictions rarely pan out the way we expect them to. The best way to protect your investments from unsystematic risks is to ensure broad diversification, like what we employ in our core portfolios. Having an overarching risk management overlay like our Risk Matrix — which takes into account the relevant data points that influence markets the most — will ensure that financial market stresses are picked up early and acted upon. And at the moment, ‘who ends up as the President’ is quite far down the list.
For more information on the investment philosophy we employ for our portfolios, come and have a chat with us.
