Which presidential candidates will be good, or bad, for the markets?

 

We should all treasure our right to vote and exercise that right with great forethought. You, our clients, are intelligent, well-educated, patriotic Americans who want the best for this country. Many of you risked your lives or lost loved ones to preserve our democracy. This election is important. We are confident you will cast your votes after careful consideration of the candidates and we thank you for that.

Unfortunately, negativity seems to be a cornerstone of many political campaigns. It is difficult, if not impossible, to ignore. Both parties use fear in their messaging and accuse their opposition of being fear mongers. If you can ignore the negativity, that’s great, you will be better off!  But these days, ignoring the noise is very difficult and we doubt this difficulty will ever go away.

Unfortunately, negativity seems to be a cornerstone of many political campaigns.

There are real issues to address and there is real news to be reported by real journalists. Unfortunately, since there are more sources than ever of information competing for our attention, the amount of noise has never been higher.

While we can’t stop the noise around the election, in keeping with our firm’s motto, “A Sanctuary From The Noise®”, we want to prepare you for what is to come so you can maintain some perspective.

Every election year, we hear the same warning, “If {insert name of candidate} wins, it will be bad for the economy or markets.”

As the primaries narrow the field of candidates, the intensity of the rhetoric will increase and you may come to believe the warning is true. Well folks, it is not true or at least highly unlikely to be true that the election result will be the cause.

It is said the President of the United States is the most powerful person on earth. In many regards, that is true. But when it comes to the economy and markets, the president is not calling the shots. Influence? Certainly, but making the economy “good” or “bad” in the straight line way the various campaigns suggest, no way.

How can we say that?  Well, we look at the facts and ignore the pundits.

 

Recessions, market corrections and the president


First, we need some definitions. Let’s define a “bad economy” as one that goes into a recession. For a “bad market” we can use the most common definition of a “bear” market – a decline of 20% or more. As you may have noticed a few times since the 2008 financial crisis, the market doesn’t need to drop 20% for it to seem like a bad market, so we will also consider “corrections,” drops of at least 10%.

The data on what became the S&P 500 index of the stocks of large U.S. companies starts in January 1926. Since then, we have had 15 U.S. presidents.  ALL 15 of them had an enormous incentive to have a growing economy and good markets yet 13 had recessions occur during their time in office (LBJ and Clinton did not). Eleven of them suffered through a bear market, with Clinton and George H.W. Bush both experiencing a 19+% decline. ALL 15 suffered through corrections, as corrections tend to happen about every other year, on average.

The behavior of the economy and the markets are not unified and often don’t make sense given the narratives.
The 1950s are fondly remembered for peacetime expansion, but Eisenhower dealt with three recessions. The 1960s were a mess yet most of the decade saw economic growth free of recession. The Carter administration is often called abysmal from an economic standpoint, yet a bear market never materialized.

Consider this four year stretch: +53.97%, -1.43%, +47.66%, and +33.92%. Those are the returns of the S&P 500 from 1933-1936. As bad as the 1930s were economically, the decade produced some of the best years the index has ever seen.

The bottom line is bad stuff happens no matter who is in office. The National Bureau of Economic Research (NBER) data shows that since the start of 20th century, the U.S. economy has been in recession about 22% of the time.

You will surely hear theories during this year’s campaign about this, but no combination of Democrats or Republicans in the White House or either house of Congress can claim to be clearly superior so don’t buy into any of that rubbish.

The other favorite is something like, “The average return in an election year or with a Democrat as president or with a Republican Senate has been X%.” We wrote about these meaningless narratives in September 2012 in an article titled, “Should I Prepare My Portfolio for a Post-Election Drop?

 

Predictions are a tricky business


Predicting the next recession, correction, or bear market is an obsession of the financial media. If you listen to such things, you will hear that the correction is “signaling” a recession. However, recessions are not reliably preceded by corrections let alone caused by them. According to Dr. Jeremy Siegel in his book, Stocks for the Long Run, of the 11 recessions since WWII, only three were preceded by a correction. Nobel Laureate Paul Samuelson famously quipped, “The stock market has predicted nine out of the last five recessions.”

Despite all the real time data available, the NBER didn’t declare the starting point of the last recession, December 2007, until December 2008. The recession ended in June 2009 but NBER couldn’t identify it as such definitively until September 2010. The press mocked them for this but these are some of the world’s top economists. Even in retrospect, identifying the start and end to a recession isn’t simple.

Predicting the next recession, correction, or bear market is an obsession of the financial media.

There doesn’t have to be a recession for a stock market correction or bear market to occur. Since the end of the last recession in 2009, we’ve experienced several corrections and flirted with a second bear market in 2011 with a 19% decline.

Starting with 1950 and ending in 2015, in 35 of those 66 years – more than half – the S&P 500 fell 10% or more during the year. There have been only four years: 1954, 1958, 1964, and 1995 in which the index did not have at least a 5% fall during the year. Each time, there were plenty of people saying it would get worse. Sometimes it did, of course. But with only 11 of those 35 10%+ drops eventually falling 20% or more, it can be said less than 1/3 of corrections have become bear markets.

 

Who wins matters but…


Declines are normal even if the news of the day seems scary or unprecedented. The news (and noise) may be different but the outcome has always been the same. Markets settled down and recovered in plenty of time for prudent, long term investors with a good plan.

Markets drop often but they have gone up more than they have gone down. There have been only two years since 1926 (1977 and 1994) during which the S&P 500 did not have at least a 10%+ increase during the year. Those that stayed committed to their investments were rewarded.

If you want to look at the election from a more positive perspective and you are telling people the markets will do well if your favored candidate wins, you will probably be right! At some point during every presidency, a dollar hypothetically invested in the S&P 500 index and left alone has reached an all-time high.

As we noted four years ago, “This is not to imply that who wins doesn’t matter. Without a doubt, the next president will have an effect on the markets, but speculating on what that effect will be is not a sound strategy for investors. We certainly agree that a candidate’s economic positions are relevant to deciding your vote. However, we want to encourage our clients to look at the candidates’ positions on the broader spectrum of issues and not place too much emphasis on meaningless and conflicting data.”

Good results should come to diversified, patient and disciplined investors because they don’t lose sight of the big picture and allow the noise of the day to redirect them to the fears of the here and now.

Who wins this election matters a great deal for many reasons but we invest over our lifetimes, not just for the next presidency. As such, we shouldn’t expect to avoid tough times. We should learn to invest through them and live with the noise that surrounds them. Invest, don’t speculate.

 

Presidency Recession “Corrections” – decline in index value of 10% or more “Bear Market” – decline in index value of 20% or more All-time high for $1 invested in S&P 500.[i]
Coolidge 1923-1929

 

2 yes no yes
Hoover 1929-1933

 

 

Great Depression yes yes yes
Roosevelt 1933-1945

 

 

2 after Great Depression ended yes yes yes
Truman 1945-1953

 

 

1 yes yes yes
Eisenhower 1953-1961

 

 

3 yes yes yes
Kennedy 1961-1963

 

 

1 shared with Ike  ended Feb 1961 yes yes yes
Johnson 1963-1969

 

 

no yes yes yes
Nixon 1969-1974

 

 

2 yes yes yes
Ford 1974-1977

 

 

1 shared with Nixon yes yes yes
Carter 1977-1981

 

 

1 yes no yes
Reagan 1981-1989

 

 

1 yes yes yes
Bush 1989-1993

 

 

1 yes no (-19% in 1990) yes
Clinton 1993-2001

 

 

no yes no (-19% during 1998) yes
Bush 2001-2009

 

 

2 yes yes yes
Obama 2009- 1 shared with Bush yes yes yes

 

 


 

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