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History shows that equities outperform under Democrats

The writer is chief investment strategist at Charles Schwab

It’s been an emotional year to say the least, heightened by one of the most contentious US election seasons in memory. As November 3 draws close, it is worth questioning the common assumption that elections have a significant impact on the economy, the stock market or both. The reality is reversed; at least based on history.

In the much shorter term, election probabilities, as suggested by polling, and the accompanying assumptions about what policies will be adopted by expected winners, can have an impact on prices and volatility. But the worst thing investors can do is attach election-related emotional volatility to their investment decision making.

Former vice-president Joe Biden leads President Donald Trump in most polls, as well as in the “betting markets” where gamblers speculate on the likely outcome. That naturally leads pundits to compare the historical performance of the stock market when Democrats or Republicans are sitting in the Oval Office.

The simple fact is that since 1900 (through October 27), $10,000 invested in the Dow Jones Industrial Average only when Republicans were president would have grown to about $100,000 (a 4.0 per cent annualised return. The same $10,000 would have grown to nearly $430,000 if it was only invested when Democrats were president (a 6.1 per cent annualised return). It is technically correct to say that the stock market has performed more than four times better when the Oval Office was “painted blue”.

But it would be foolish to stop there. If $10,000 was invested in 1900, and remained invested regardless of presidential political party, it would be worth more than $4.3m today, an annualised return of 5.2 per cent.

Many investors seem to be looking for a clear relationship between presidential elections and market performance. That does not happen with consistency when comparing market performance to economic variables, sentiment conditions, earnings growth rates, valuations, or interest rates . . . and it certainly does not happen with elections and the market.

If anything the economy and the stock market affect elections more than the reverse.

Since 1900, there have been 14 presidential election years during which there was an economic recession or an equity bear market that dropped 20 per cent or more, or both. In nine of those cases (about two-thirds of the time), the incumbent president lost the race.

In the modern era, since 1952, six presidential elections have been accompanied by a either a recession or a bear market or both. In every case, the incumbent president lost the election. More stark is what has happened during healthier economic and market times. Of the 16 election years when there was neither a recession nor a bear market in stocks, the incumbent president won 13 times, while only losing three times.

Of course, the 2020 election is not just an election for president; but also for many members of Congress. There are six broad outcomes following presidential elections: a Democratic president with a Democratic Congress, a Republican Congress or a split Congress or a Republican president with a Congress of his own party, a Democratic Congress or a split Congress.

The Dow Jones’s best performance historically has come when there was a Democrat in the White House and a split Congress. But there’s an important caveat to this annualised return of 10.4 per cent. This outcome has occurred only once since 1901, during the four years when Barack Obama was president and Congress was divided, from 2011 to 2015 — only 3.4 per cent of the time, according to our research.

The worst performance came with a Republican president and a split Congress — a combination that occurred 11.5 per cent of the time (including right now) — resulting in an annualised loss of 2.9 per cent. As for the two most common combinations — full Democratic control and full Republican control — there were nearly identical annualised returns of just over 7 per cent.

Of course past performance is no predictor of the future, and the rear-view mirror should be used to educate, not invest. Voters may have a strong bias with regard to political candidates or party; but when it comes to investing, it should not play a leading role. The economy and the stock market are highly adaptive . . . ultimately. Waiting for a political party to lose (or gain) power has the effect of robbing investors of time in the market; which is always more valuable than timing the market.

A long-term perspective is essential; and panic is not an investment strategy.

Video: Why Wall Street turned Democrat | Charts that Count


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