On Tuesday, November 8, the United States will vote on who will succeed Barack Obama as the nation’s forty-fifth president and which party will control each house of Congress. In anticipation of the election, economic and political pundits are out in full-force trying to show the potential effects of different election outcomes on financial markets. As we discuss below, we believe that the result may cause some short-term volatility depending on who wins the presidency but that over the long-term, underlying market fundamentals (generally not dependent on who is in the White House) will dictate prices.
At Delegate, we are apolitical and do not take a view on a desired election outcome. Our goal is to analyze current and historical data in order to best advise our clients, and the following commentary should not be construed as an endorsement of either candidate. As of today, most prediction models point to a Clinton victory with a Republican-controlled House of Representatives. The makeup of the Senate remains a virtual toss-up, with a slight edge to the Democrats. Of course, there is still time before the election for anything to happen, leaving the eventual outcome uncertain.
In the short term, we believe that a Clinton victory would leave the economic status quo mostly intact. Because the market has essentially priced in a Clinton victory, we would not anticipate substantial market volatility. A Trump victory would have a more significant short-term market impact. In the immediate aftermath of a Trump victory, financial markets would likely need to digest what a Trump presidency would mean for domestic and global economies. Some experts have predicted that, in the event of a Trump victory, this uncertainty may cause the value of the S&P 500 to drop by 10-15%.1 This may look like the aftermath of Brexit, where markets dropped immediately following the news but recovered quickly; or, it could have a more severe impact given the uncertainty around Trump’s policies, perhaps most significantly the potential renegotiation of the US’s trade agreements.
With respect to potential market performance, recent historical evidence suggests that equities perform relatively well in the event of a Democrat president and a Republican or a split Congress. An analysis of market index data, illustrated above, shows the average annual return of the S&P 500 during periods of differing compositions of party control of the presidency, the House and the Senate since 1953. In summary, equities have experienced relatively higher returns with a Democrat in the White House and a Republican-controlled Congress, followed closely by a Republican president and Republican Congress. Under the two most likely November scenarios, a Democratic president with either a Republican or split Congress, equities have produced an average annual return of 19.4% and 16.1%, respectively.
It is important to remember that correlation is not causation. For example, George W. Bush’s tenure included the Great Recession, while Barack Obama’s has included the recovery. Many argue, however, that certain of Alan Greenspan’s actions as Chairman of the Federal Reserve implemented under Bill Clinton contributed to the recession, the effects of which may not have been felt until years later. Thus, while this data may be anecdotally interesting, we do not believe it to be an informative input into future returns compared to fundamental market data such as economic growth, interest rates and valuations.
In the long-term, we believe that markets will price securities according to the underlying fundamentals and that the person in the White House ultimately has little influence over the performance of the global economy. In fact, we believe the more substantial issue for our clients will likely be changes to the tax and estate laws that may occur as a result of the new government, which will play out over the next four years and may merit discussion after the winner is named and the political agenda for the next four years becomes clearer.
1 Source: Wolfers, Justin, and Zitzewitz, Eric, What do financial markets think of the 2016 election?, October 20, 2016, available at: https://www.brookings.edu/wp-content/uploads/2016/10/what-do-financial-markets-think-of-the-2016-election_102016_wolferszitzewitz.pdf