Presidential Elections and the Markets – Is There a Connection?
Well the debates are complete, early voting has started in some states, and we are only days away from perhaps one of the most consequential elections of our lifetime. Over the past couple of weeks more than a few clients have asked us – what will be the impact on my portfolio if Trump wins, or if Biden wins? Both sides claim the election of the other will result in economic devastation and another bear market. Pundits on either side of the aisle fill the airwaves with their hyperventilating proclamations that the other side will bring economic ruin.
Our view? Unfortunately, the Resolute Financial crystal ball is in the shop, and the local Nostra Damas Crystal Ball Shop has not been deemed an essential business during the pandemic, therefore, we don’t expect to get it back anytime soon. So, we aren’t much help in predicting the election results nor its impact on the markets. However, our friends at Dimensional Fund Advisors (DFA) have done a deep dive into the historical connection between the President and the markets to try and decipher what the result of this election might have on the stock market and ultimately on your portfolio.
Surprisingly, it turns out there isn’t much of a correlation between the President, his political affiliation, the party in control of Congress, and the performance of the stock market. In fact, what is remarkable is over the last 80 years when Democrats controlled both Congress and the Presidency, the US stock market on average returned 14.52% annually. When Republicans controlled both, the market returned 14.52%; the performance is identical down to two decimal places! Who would have guessed that?
For a more in-depth discussion DFA has provided a video summary of their study at the following link: https://www.mydimensional.com/video/40459/highlights-what-history-tells-us-about-elections-and-the-market.
And for a fun interactive exhibit that shows an overview of the past 100 years of US presidential terms click on: The President & Markets.
The market conditions are as anticipated – volatile. This week’s market activity has been dominated by concerns about Covid-19’s impact on future growth and earnings. We’ve had several key tech companies report stellar earnings, and we believe that some of the market activity has been driven by profit taking in some of these highly valued tech stocks. As always, we are here to answer any of your questions and we encourage you to be in contact with us.
Source: Dimensional Fund Advisors