Elections and Stocks: Party Performance, Predicting and Potential Market Winners

With less than three months until the presidential election, investors are questioning the impact of the election outcome on their investment decisions. Three leading market experts and contributors to MoneyShow.com look at the upcoming election from a fundamental, technical and historical perspective. James Stack, InvesTech Research Will the stock market affect the outcome of the election? Over the past several months the coronavirus pandemic and economic shutdown have been the center of attention for the media and politicians alike, while the upcoming election has played second fiddle. However, presidential candidates should probably be watching the partial recovery and stock market rally more closely. Historically, the market's performance in the three months leading up to a Presidential Election has displayed an uncanny ability to forecast which party -- the incumbent or the challenger -- will win the White House. Since 1928, there have been 23 Presidential Elections, and in 14 of them, the S&P 500 moved higher during the three months preceding Election Day. In 12 of those 14 instances, the incumbent president or party won the presidency. Conversely, when the S&P 500 fell over that three-month period, the incumbent party lost. There have been only three exceptions to this correlation, and those were in 1956, 1968, and 1980. As a predictive indicator of the presidential race, the stock market can claim an impressive 87% success rate! Admittedly, the three-month pre-election gain or loss can be minute, as it was in 1976, but there is a logical explanation behind the association. The stock market typically reflects the economic outlook in the weeks leading up to Election Day. A rising market indicates an improving economy, which means rising confidence and an increased chance for the incumbent party to retain the top office. In other words, people tend to vote their pocketbooks. Starting August 3, your time may be better spent watching the health of the stock market and the indicators in this issue than the presidential debates if you want to know who will be president for the next four years. Which is better for the stock market -- a Democratic or Republican president? This is a hotly debated topic, and the answer is... It depends! The reason this response is so nebulous is that by carefully selecting the period to be studied, the results can be (and often are) subject to manipulation. When InvesTech Research was started in 1980, it was widely recognized that the market flourished under Democratic Presidents far more than under Republicans. From 1928 to 1980, the average annualized return when a Democrat held the Presidential office was more than four times greater than under Republican Presidents: 12.0% to 2.6%. This was purportedly because Democrats favored higher government spending, which stimulated the economy. Then by 1992, after 12 years of superlative stock market performance under Ronald Reagan (R) and George Bush, Sr. (R), the tables had shifted. If one is selective in choosing the starting point (e.g., 1952), it could be argued that the stock market showed a slight preference for Republican Presidents. After the irrational exuberance of the 1990s under President Clinton (D), and the unfortunate aftermath of two valuation bubbles (stocks in 2000 and housing in 2007) under President Bush (R), the performance pendulum had swung back in favor of Democrats. Over the past decade, President Obama (D) presided over eight years of stock market recovery coming off the most oversold level in 75 years, and President Trump's four-year Republican administration has extended that rally. As a result, the total market performance from 1928 until today has improved for Republican Presidents, but still favors Democratic Presidencies by nearly a 2:1 margin. Yet, the more one analyzes history and the factors underlying these statistics, the less important they seem. The argument that Wall Street prefers one party over the other can be made either way depending on the time frame studied. As shown over the last decade, the stock market can perform well regardless of which party occupies the White House. Jeffrey Hirsch, Stock Trader's Almanac August has been the worst DJIA, S&P 500 and NASDAQ month of the year since 1988. However, August's track record in election years since 1950 (DJIA & S&P 500) or 1971 (NASDAQ) is much better. Average election year August performance ranges from 0.7% by DJIA to 3.3% for Russell 2000 (since 1979). This election year could be different since the pandemic has changed the date and structure of the conventions which have historically taken place in July. There has been a bit of chatter out there about how Q3 of election years is the best performing quarter of the entire four-year presidential stock market cycle. But that study uses data going all the way back to 1900 when the world was a much different place with much of the economy driven by agriculture. Our studies show that all the election year Q3 outperformance transpired before WWII with an average DJIA gain of 11.1% from 1901-1948. However, from 1949-June 2020 election year Q3 averaged DJIA gains of only 0.7%, ranked 11th of 16. Also any improvement to August and September performance during election years is attributable to the buzz and excitement around the conventions. Nowadays campaigning goes on pretty much nonstop. The rally off the pandemic low has put the market back at lofty levels again. With most of the good news baked in, the market will be hard-pressed to add significant gains over the next two to three months without some major virus breakthroughs and a return to more normal economic activity. Checking the accompanying updated chart of election years tracking 2020 S&P 500 performance versus all election years and incumbent party wins and losses -- as well as the polls -- suggests that President Trump's reelection is not a forgone conclusion. In fact S&P 500 is tracking the incumbent loss trend more closely. But that of course remains to be seen. Market performance over the next three months is critical to President Trump's reelection bid and you can be sure he is well aware and will do everything in his power to boost the market as all incumbents generally do. Robert Sweet, Dow Theory Forecasts In case you hadn't noticed, we have an election coming up. At the ballot box this fall, voters will select 11 state governors, 35 U.S. senators, 435 U.S. representatives, and one president. Rhetoric from all segments of the political spectrum has turned shrill, featuring frequent projections that the election of so-and-so could spark the downfall of the free world. But of more interest here at Dow Theory Forecasts is how the election will affect the stock market. With the caveat that both politics and financial markets are unpredictable, and the intersection between them doubly so, here are a few potential winners and losers in this election cycle: 1) Megacaps Calls for tighter regulation of the largest companies come from a wider range of sources than was the case a few years ago. However, we see a greater chance for aggressive regulatory action under Joe Biden than would be the case under President Trump -- particularly if Democrats gain control of the Senate. Conclusion: While a Democratic resurgence would ratchet up the pressure on companies like Alphabet , Apple , and Facebook , stiffer antitrust regulation seems far more likely than forced dismantling of these high-tech empires. History suggests well-managed companies adjust to new rules and move on. Consider this one a modest negative if the Democrats gain influence. 2) Healthcare The Affordable Care Act has hung around long enough that a complete overhaul seems unlikely even if the Republicans maintain control of the Senate and the White House, and the true impact of the election on health care isn't clear cut. Mandated reductions in drug prices seem more likely under Democrats (Biden has pledged to cut costs), bad for drugmakers like Bristol-Myers Squibb but good for insurers such as Anthem and UnitedHealth Group . Conclusion: A Democratic triumph may slightly benefit health care as a sector, but not everyone would share in the largesse. 3) Energy A Democratic Congress might use regulation and tax credits to advance renewable energy. Conclusion: A rise in the power of Democrats isn't good news for old-line oil majors like Exxon Mobil or Chevron . 4) Defense Some analysts have attributed the recent weakness of aerospace & defense stocks to the improving prospects for Biden and Democratic candidates in the House and Senate. However, with the proposed 2021 defense budget roughly equal to 2020 spending and defense spending near a record low as a percentage of gross domestic product, we don't expect major cuts regardless of how the election shakes out. Conclusion: Booz Allen Hamilton , L3Harris Technologies , and Leidos remain well positioned to meet or exceed expectations. 5) Industrials Aggressive infrastructure spending has long been near the top of Democrats' toolbox during periods of economic weakness. Conclusion: A Democratic victory could provide extra business for companies serving the construction industry. 6) Financials While Democrats could ramp up regulation of financial services companies, the Federal Reserve and other agencies have taken an increasingly activist tone in recent years. Conclusion: A Democratic win looks like a slight negative for banks such as JPMorgan Chase , though insurers like Progressive could see little difference. You may have noticed a theme in the previous paragraphs, that the likely effect on stocks is modest regardless of who wins. In most cases, political developments drive headlines but don't translate to major operational changes. In addition, even a Democratic sweep (taking over the White House and Senate) probably wouldn't provide the large majorities needed to push through major changes. Oddly enough, the biggest risk to the market might stem from the election itself, as a disrupted vote would not help stocks. With states making it easier to vote by mail and the possibility of a resurgence in the coronavirus, this year's election will be more complicated to administer. The risk of real or perceived irregularities seems higher than usual.

Elections and Stocks: Party Performance, Predicting and Potential Market Winners

The market's performance in the three months leading up to a presidential election has displayed an uncanny ability to forecast which party will win the White House.

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