Red, White, & Blue

The U.S. presidential election is less than a week away. Both sides are dug in and tensions are so thick you could cut them with a knife. Not only is this expected to be a close race, but as both candidates decry, it will be one of the most consequential elections of our time. They may be right in terms of policies and precedents. However, how much will the election matter to the markets?

In the U.S. investors seem to be holding their breaths in anticipation of election results. The equity market has stalled and the S&P 500 has moved sideways for the past month. I wrote last quarter that the election will, of course, have some influence on financial markets. For example, changing tax policies could cause market-wide price adjustments for affected investments.

However, those adjustments are typically defined and not perpetual. After the adjustments happen, politics seem to have less impact on financial markets than politicians would like us to believe. The chart below from The Motley Fool provides an example. It shows the annual returns for the S&P 500 since 1957. Years with a Democratic president are blue and years with a Republican president are red.

An obvious observation from the chart is most annual returns were positive, regardless of party. Other observations are more surprising. Although Republicans are seen as more market-friendly than Democrats the median return for Democrats is higher than for Republicans (12.9% vs 9.9%). In addition, Republicans experienced more negative years and also the worst years.

Looking deeper, we can find similar surprises in equity market sector performance. Energy sector stocks were down -27% during former President Trump’s term. On the other hand, the energy sector is up a whopping +152% under Biden! This is despite Trump being a proponent of domestic oil and gas production while Biden is not.

Does that mean Democrats are better for stocks? No, it doesn’t. I’m confident we could find market data showing that stocks favor Republicans instead. It means politics don’t always influence the financial markets in ways people expect or in ways politicians promise.

If we look back far enough (instead of cherry-picking terms and sectors) the data start to converge and the annualized returns average 9% – 10% regardless of Democrat or Republican. So, over time party affiliation doesn’t seem to matter much.

We should keep that in mind as tensions rise into this election. Right or left, we’re not that different after all. At the end of the day, we’re all the same colors, red, white, & blue.

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Victor K. Lai, CFA