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Will this Election Year Be Politics as Usual?

By Nela Richardson August 25, 2020

As we approach November, the U.S. presidential election will be a key focus for investors. Historically, election years have been positive for stocks, with equities returning 9.5% annually on average and the market rising in 78% of presidential election years since 1947.* However, the 2020 election will likely be heavily influenced by the unprecedented COVID-19 pandemic, the resulting recession and the emerging, albeit rocky, recovery. In an election year marked by unique economic and social challenges tied to the pandemic, here are three trends you should know when it comes to politics and investing.

1. Consumer confidence is often tied to partisan views, even when market conditions are favorable.

Consumer spending drives two-thirds of economic growth. When consumers feel confident, they are willing to spend more and that spending boosts demand and economic growth. As this chart shows, consumers tend to have more confidence about the economy when their preferred party is in office. Democrats expressed higher levels of confidence between 2008 and 2016 when President Obama was in the White House. Since 2016, Republicans have reported higher levels of confidence under President Trump’s administration. Independents tend to exhibit confidence at levels between the two political parties. More recently, sentiment has slumped for all three groups due to the economic downturn, with Republicans feeling most positive. What's important to note is that in each of these time periods, the stock market increased, growing 14.6% and 14.7% during the first and second Obama terms, and 12% to date under Trump.

Source: FactSet, University of Michigan, 6-period moving average.

The lesson here is that playing politics with your portfolio could have caused you to miss solid stock market performance under both administrations. Even during market and economic turbulence, keeping a nonpartisan approach to investing helps achieve better portfolio performance over time.

2. Now more than ever, economic and corporate conditions matter more than politics.

Years of divided government, over several presidential terms, has led to an ongoing expectation among investors of policy gridlock on key economic issues. However, the severity of the pandemic, and its effect on the economy, led to a broad-based bipartisan effort to provide a much-needed lifeline to businesses and consumers, in the form of direct payments to households, extended unemployment benefits and low-cost loans. The combined monetary and fiscal response to the pandemic was more aggressive and occurred sooner than in any other recessions. The Federal Reserve pledged $2.3 trillion to help the economy get back on its feet, a larger sum than even during the Great Recession. Fiscal stimulus totaled over $2 trillion and is expected to grow, making it the largest rescue package, as a percentage of GDP, to date – second only to Roosevelt's 1930s New Deal.

Federal stimulus will be a key component of the economy for some time in the future, regardless of who sits in the Oval Office. The drop in economic activity this year is likely to be the deepest since the Great Depression but could also lead to a quicker than average start to the recovery, due in large part to federal relief efforts.

3. Investors’ knee-jerk reactions to election outcomes are often misleading.

We expect the economy to start to rebound in the second half of the year. But the climb back to pre-pandemic levels is likely to be rocky, due to an injured labor market caused by the national lockdown and the challenges of reopening the economy during an ongoing pandemic. This economic and market uncertainty, as well as sizeable differences in policy platforms between the two candidates, will likely keep volatility elevated in the lead-up to the election and even afterward. Looking back, stocks initially dipped 5.3% and 2.4% after Obama's 2008 and 2012 victories, respectively. Stocks declined 4% in the early hours after Trump's victory as well. These postelection dips proved short-lived, with stocks quickly reversing course. This postelection performance fits with historical precedent. Since 1947, the S&P 500 has climbed 6% on average in the 12 months following a presidential election, about the same percentage as the 12 months preceding an election.

Source: Morningstar (1936-2019), Edward Jones calculations. The S&P 500 is an unmanaged index and cannot be invested in directly.

Market reactions to leadership changes are hard to predict. While this election poses unique challenges, we don’t think politics is a long-term driver of markets. Stock markets have averaged 10% over the past 30 years, regardless of which party controlled the White House and Congress, and under a divided government. Moreover, policy plans and proposals introduced on the campaign trail tend to change a great deal as they move through the democratic process. What history shows is that the effect of election outcomes on markets is generally temporary and economic and corporate fundamentals are what drive stocks over time. Because of this, our advice during the 2020 election season is the same as any other season: Don't play politics with your portfolio.

* Morningstar (1947-2019), Edward Jones calculations. The S&P 500 is an unmanaged index and cannot be invested in directly.

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