Let’s Talk Politics

Last week we met with a number of customers and prospective customers to discuss markets and the economy. During the Q&A session a question was asked regarding the presidential election and its impact on markets. A great question, especially during such an interesting election cycle!

While the political debates make for interesting sound-bites, the reality is that presidential candidates’ stump speech policies have little likelihood of becoming reality. Truth be told, the economy the winner inherits is much more important than their policy prognostications.

Election Cycle Returns

The chart below shows how the stock market performed in the years during and after a presidential election. It covers a period beginning in 1948. What you’ll notice first is that both years during and after an election, when the incumbent party wins, stock investment returns are higher. In the last year of a presidency the average return is 13.36% when the incumbent party wins and only 5.98% when the party turns over. The year after an election produces a similar result, returning 15.54% when the party remains the same and 3.75% when the party turns. Because markets don’t like uncertainty, the consistency of maintaining the same person/party may improve potential returns.

Turnover means a potential change in social and fiscal policies and that creates uncertainty. Keep in mind that a presidential election year also means a substantial portion of the Senate is up and turnover can happen there as well.

You’ll notice too that stock returns are better in 7 of the periods measuring the year after an election when the incumbent party is Democratic. In each of these cases, the elected president inherited an economy that was doing well. The exception here is the economy inherited by Jimmy Carter which was wracked with high inflation and low economic growth.

What about Congress?

The chart below provides information regarding U.S. stock market investment returns based upon who is in control of the White House, House of Representatives and the Senate. The data provided here represents markets from 1953 through 2015.

You can see in this case markets seem to prefer a White House controlled by one party and a Congress controlled by another. It seems that investors appreciate a balanced approach to governing more than the parties themselves do.

The average stock return for the S&P 500 Index over the entire period was 12.08%. The best performing periods were when a Democrat was in the White House and Republicans were in control of Congress. The average return here was 19.40% aided by the 1990s.

When a Democrat was in the White House and the Congress was split along party lines the average return was 16.05%. A split Congress and a Republican in the White House produced an average return of 7.73% over the period, the lowest return of any combination.

These returns seem to represent a similar outcome to that stated above. Markets don’t like uncertainty. One thing that is certain when Congress and the Administration are not from the same party is that policy progress will be slow. It seems that stock investors like it that way.

Voters should be focused on fiscal policy. The economy is growing at a reasonable pace given the improvement in productivity and growth in the labor-age workforce. Employment growth has been reasonable. Wages and personal income have been above average on a real basis. The one area of the economy that needs some help is fiscal policy. Deficits continue to run in the hundreds of billions and spending isn’t creating growth. If you want to focus on presidential election politics think about fiscal policy no matter who you vote for.

© Johnson Bank

© Johnson Financial Group

Read more commentaries by Johnson Financial Group