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The stories that matter on money and politics in the race for the White House
The ability to decipher true investment information from noise is always key to successful investing, but today’s highly polarised US presidential election presents an extraordinary challenge to investors. Filtering what’s important from the chorus of vitriol and hyperbole seems more difficult than ever before.
Investors today need to be particularly dispassionate on politics because the current race is attracting more of their attention than it deserves. The reality is that presidents have historically had relatively little impact on financial market returns. There can be short-term market reaction to an election, but longer-term equity, asset class and sector returns are not generally reflective of a presidency. Returns are in some cases opposite to those implied by amplified electioneering.
The stock market has generally performed quite well regardless of who is in the White House. Since Jimmy Carter’s presidency, the S&P 500 has had double-digit annualised total returns during every presidential term except one. The S&P 500 even returned nearly 13 per cent a year (roughly 3 per cent real return a year) during Carter’s inflationary years.
The S&P 500 had a negative annualised return only during George W Bush’s term. That one occurrence of long-term negative returns coincided with the period after the technology bubble burst. And the S&P 500’s annualised return was identical (16.3 per cent a year) during Barack Obama and Donald Trump’s presidencies, despite their starkly different goals and policies.
Investors sometimes anticipate that a candidate’s proposed policies and regulatory framework will hit sector returns, but history again suggests presidents do not have as much influence on sectors as is commonly thought. In fact, sector returns are sometimes the exact opposite of what was anticipated pre-election.
For example, Trump denigrated the technology sector in his 2016 campaign and pushed to expand US energy production. But technology turned out to be the best-performing sector during his administration and energy the worst. Joe Biden entered the White House emphasising clean energy and other environmental, social and governance priorities. Yet energy, a sector dominated by traditional producers, has so far been his term’s top-performing sector.
Election slogans have similarly had little to do with subsequent asset-class returns. Five different asset classes had the best annualised returns during the eight presidential terms studied. Real assets in particular seem to outperform unpredictably rather than by policy prescription. Gold was the best-performing asset class during both the Carter and Bush terms. Perhaps spurred by the pandemic’s supply-chain disruptions, commodities have been the best performer under Biden.
Ironically, more domestically focused US small caps outperformed emerging markets during Clinton’s term despite his globalist policies. US multinationals and emerging markets also outperformed US small caps during Trump’s presidency even with his emphasis on protectionism. Fundamentals such as earnings and valuation proved more important than Nafta or Maga.
Political fear-mongering on the budget deficit and US debt levels exemplifies election noise masking true investment insight. Neither Democrats nor Republicans can claim any history of fiscal conservatism despite today’s finger pointing. US debt to GDP grew the fastest under Ronald Reagan, passed 100 per cent under Obama and stayed above 100 per cent during the Trump and Biden terms. Interest payments as a percentage of GDP are rising, but were higher for 17 years spanning the Reagan, Bush and Clinton years. Dire forecasts that the US might “inflate away the debt” seem to ignore that the US did exactly that during the years of Lyndon B Johnson, Richard Nixon and Carter in office.
One investment theme that might transcend politics is deglobalisation and the re-industrialisation of the US economy. The re-industrialisation theme has been outperforming for a decade and now both parties seem to realise that the US’s significant dependence on the rest of the world for production of most goods has become a national security risk. Small- and mid-cap domestic industrial stocks seem attractive regardless of who wins the election.
Politicians love the spotlight and it’s a shame investors watch their show. A consistent investment process based on time-tested fundamentals seems a good way for investors to remain dispassionate, focused and able to ignore the election’s histrionics that are likely to yield little if any important market information.