Should the Markets Care Who Takes the White House?
October 3, 2016
The first of the three Presidential debates occurred this past week. The most common view seemed to be that, in round one, Clinton got the better of Trump. That being said the polls still suggest the election will be very close. With November 8th coming up fast, the next thirty six days will be filled with uncertainty, second guessing, and wild speculation – all those things that the markets despise. With the polls so close, and the unpredictable impact of our arcane electoral college system, no one can be certain who will win. So should the market care who is the next President?
As everyone knows, President Obama could not run this time because of our presidential term limitations. Market history reveals some interesting patterns around the end of an incumbent’s second, and therefore last, term of office. During the eight times that this has happened the last year of their term has seen a decline in the US equity markets. This year has been an exception so far.
What is also interesting is that in the years when a sitting president runs for reelection the market generally goes up. No wonder standing as the incumbent is favorable and as we have all seen, they typically get reelected. When an incumbent is seeking reelection the markets are dealing with a known entity. They understand his policies, they know what to expect, and the land of no surprises is good for the markets.
Right now the markets are faced with two new players. Does it matter whether the winner is a nominally Republican businessman, or a career Democrat politician and fixer? The mainstream, but often incorrect, bias is that a Republican is pro business, and produces fewer regulations and lower taxes; things which should be good for the market. History paints a more nuanced picture. The markets roared higher under Democratic Presidents Roosevelt, Clinton, Obama, as well as under Republican Presidents Reagan and Eisenhower.
Historically the market typically moves higher during the immediate post election period. On average a 6% rally occurs regardless of which side wins. I suspect this uplift occurs partly as a result of the clearing of the air of uncertainty.
I have always thought that smart entrepreneurs and savvy executives who are running businesses will figure a way to make money. Presidents come and go, policies will change, but businesses roll on. Industry groups that have been out of vogue return to favor, and smart business people figure out how to make money irrespective of who’s in the White House.
Of course, if you are nervous about the market because of the uncertainty leading up to the election, then you should reduce risk. If you have a long term plan then the historical returns in the market would suggest you stick with your plan, stay the course, vote, and enjoy watching the election return results as best you can.
Carl Gambrell
