Election Impact On The Market
Now that the major party conventions are behind us and each party’s platform have been presented, investors are contemplating the implications of this year’s presidential election may have on financial markets. While there have been numerous empirical studies of stock market performance around elections, the only prediction that has proven to be statistically dependable, is that the market strengthens in the last two years of an incumbent’s term. As we all know, even that situation does not apply this year.
There is little in the way of a reliable framework for forecasting market performance around presidential elections. One thing most people seem to agree on is that the current contest is anything but typical. We suspect that the resulting market impact may follow suit. As of this writing, the race remains close and unless the outcome becomes more apparent prior to the election, investors might be in for a market shock in November.
The long held belief that Republicans are the party for investors, business and markets seems to be shifting, or is significantly more nuanced this year than in previous elections. If the proposed party platforms are put in place, the election will result in industry level winners and losers regardless of the election outcome. What is consistent among candidates is a belief that infrastructure spending is needed; and if achieved, this will be beneficial for industrial and materials sectors. There is also consistency regarding the desire to maintain or strengthen regulation in the financial services and pharmaceutical industries. Where the parties diverge is on energy, with a desire to ease fossil fuel energy regulation under a Republican administration, which differs from Democrat support of renewable energy. A Democratic administration would also likely benefit healthcare services companies; while a Republican win most likely would lead to efforts to dismantle the Affordable Care Act.
In terms of broader economic issues related to taxes, spending and trade initiatives, each candidate has distinct ideas about what is needed to expand the economy and employment in the U.S. This leads to the mire and muck of economic ideology. To suggest that one approach is better than the other is generally not productive. Our economy has been built on many different economic and political ideologies over the years. It has never been a pure ideology and there will always be push and pull around economic theory. What we do know is that, with respect to fiscal and regulatory policy, markets appreciate certainty and a measured pace. To this end, the ability of a candidate to present a plan that has a chance of proceeding, given the congressional election outcome, is likely to be a meaningful driver of market sentiment when the tally is in.
We believe investors are well served by a clear headed separation of their personal political beliefs, when making financial decisions. No matter what the election outcome, a large portion of the country’s voters are going to be very uneasy with the results. This may cause them to run to their brokers and hit the sell button. The markets may react negatively.
If we have learned nothing else, history, particularly around human behavior, repeats itself. It was only a month ago that BREXIT shocked the world and markets… for about a week. Policy takes time and the legislative process is slow. The Presidential election does not instantaneously change anything. The bottom line is that, while discussions about politics and potential market reaction are interesting to consider and may result in some tactical portfolio adjustments, this election is now and may remain too close to call and should not drive significant investment decisions.