Election 2020: 5 Truths To Remember About Politics And Investing

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History teaches us that elections tend to not have the dramatic impact on the financial markets that investors fear or hope.

Vice President Dan Quayle once declared, “This election is about who’s going to be the next president of the United States!”1 Quayle’s stating of the obvious was mocked by the nation’s punditry. From an investors’ perspective, however, the gaffe might be more brilliant than any of us originally realized.

History teaches us that elections tend to not have the dramatic impact on the financial markets that investors fear or hope. After all, the US equity market, as represented by the S&P 500 Index, returned 10.2% per year from 1957 through the end of the third quarter 2020.2 Per the Rule of 72, that’s a doubling of the broad US equity market every 7.05 years across seven Republican administrations and five Democratic administrations.3

With the nation mercifully approaching the November 3 election, I believe there are five truths about politics and investing that are important to remember. As Jerry Seinfeld titled his 1998 comedy special, “I’m telling you for the last time” (or at least until 2024).

1. Hating the government is not an investment strategy

The last presidential election was decided by 80,000 people in three states.4 In a country of about 328 million people (130 million voters), that is a remarkably small number.5 Prior to that, in 2012, Barack Obama won re-election with only 51.06% of the vote.6 Recent poll numbers are again telling us that a large percentage of the population may not be happy with the outcome.7

Fortunately, it is not a prerequisite that an overwhelming majority of the country approve of the president for US equities to go up. In fact, history has shown it’s just the opposite: Markets, historically, have performed best when the president’s approval rating was between 35 and 50, proving, once and for all, that hating the government is not an investment strategy.8

2. Divided government is not a prerequisite for sound market performance

It’s no secret that the US equity market has historically performed best with a divided government. Although, I’d argue that well-known “fact” may not be as statistically significant as investors suspect. For example, since 1933, the best outcome for the S&P 500 Index (+13.6%) based on partisan control was with Democrats in the White House and Senate, and Republicans controlling the House of Representatives.9 What is often not mentioned is that combination only existed in four of the past 88 years (4.5% of the time), from 2011 to 2015. With apologies to President Barack Obama, Majority Leader Harry Reid, and Speaker John Boehner, I suspect the outsized outcome was largely reflective of the times (economic recovery, US Federal Reserve’s zero interest policy) rather than of the talents of the nation’s leaders.

For what it’s worth, the US equity market has also occasionally produced outsized returns even under single-party government rule. A unified government did not appear to be an issue for the S&P 500 Index in Obama’s first year (+44% from January 20, 2009 to January 20, 2010) nor in Donald Trump’s first year (+26% from January 20, 2017 to January 20, 2018).10

3. Specific market predictions based on election outcomes tend to be inaccurate

There is a cottage industry built on advising investors on how different asset classes, sectors, and industries may perform based upon which party controls the executive branch of government. Does anyone ever go back and look at the predictions?

For example, in 2008, many people believed that the McCain-Palin “drill baby, drill” ticket was good for big oil, while Obama-Biden were going to decimate the fossil fuel industry. But in Obama’s first term, advanced techniques for oil extraction drove production to a 45-year high11 and the Alerian Master Limited Partnership Index climbed by 93%.12 And in 2016, many believed that Trump’s tax and regulatory policies would lead to a sustained rise in interest rates and unlock the value that existed in the financial sector. Although the stock market performed well during Trump’s term, the financial sector was among the worst-performing sectors.13

4. Starting points matter

How is it that such diverse presidents as Ronald Reagan, Bill Clinton, and Barack Obama each experienced outsized equity market returns over the course of their administrations? To rephrase Clinton strategist James Carville, “It’s the starting point, stupid.”

Reagan, Clinton, and Obama each became president at moments when:

  1. The economy was in or recently coming out of recession.14
  2. Stocks were trading at historically cheap levels.15
  3. The Federal Reserve was easing financial conditions.16

Today’s backdrop doesn’t appear to be significantly different than the one those presidents inherited (while stocks aren’t necessarily trading at cheap levels, they are historically cheap to bonds).17 That’s true no matter who wins the election.

5. Private sector ingenuity continues unabated

Quayle was right. This election is about who’s going to be the next president of the United States – it’s not about which sector may outperform next year, or where the stock market may be in the next four years. I’m far more interested in the business leaders who are going to harness the powers of artificial intelligence and robotics, create the next generation of life sciences that can cure our most debilitating diseases, address the COVID-19 crisis, continue to evolve the nation’s energy sources, and develop new technologies and new industries that aren’t even yet on our radar. Here’s an abridged list of products or services brought to the market over the past 12 years: cloud computing, tablets, wearable fitness trackers, 3D printing, social media, ride sharing, the world’s first full face transplant, the world’s first bionic eye implant, electric cars, driverless cars, virtual meeting software, gene editing, multi-use rockets, virtual home assistants, virtual payment systems, smart homes, to name a few.

History suggests that the advancements are about to get a whole lot better, irrespective of who wins the election. They always have.

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1 This quote, reportedly uttered on the campaign trail in 1988, is widely found on many lists of famous quotes from politicians, including brainyquote.com, quotefancy.com, and many more.

2 Source: Bloomberg, Standard & Poor’s, as of 9/30/20.

3 Source: Bloomberg, Standard & Poor’s, as of 9/30/20. The Rule of 72 is a popular shortcut used to estimate the number of years required for an investment to double in value at a given annual rate of return.

4 Source: Federal Election Commission

5 Source: US Census Bureau, as of 2019

6 Source: Federal Election Commission

7 Source: RealClearPolitics, as of 10/22/20.

8 Source: Bloomberg, Gallup, Invesco, as of 9/30/20. Results are based on grouping the Gallup Presidential Approval Ratings into four quadrants (> 65, 50-65, 35-50, and <35).

9 Source: Strategas Research Partners, as of 9/30/20.

10 Source: Bloomberg, Standard & Poor’s, as of 9/30/20.

11 Source: US Department of Energy

12 Source: Bloomberg

13 Source: Bloomberg, Standard & Poor’s, as of 9/30/20. Results are a comparison of the S&P 500 Financial Sectors Index vs. each of the other S&P 500 Global Industry Classified Standard (GICS) 1 sector indices.

14 Source: US Bureau of Economic Analysis

15 Source: Bloomberg, as represented by the price to earnings ratio of the S&P 500 Index.

16 Source: US Federal Reserve

17 Source: Bloomberg, as of 9/30/20. Analysis compares the earning yield of the S&P 500 Index to the 10-year US Treasury rate.

Important information

Blog header image: Bloomberg Creative / Getty

All investing involves risk, including the risk of loss.

The Alerian MLP Index is a float-adjusted, capitalization-weighted index measuring master limited partnerships, whose constituents represent approximately 85% of total float-adjusted market capitalization.

The opinions referenced above are those of the author as of October 28, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Election 2020: Five truths to remember about politics and investing by Invesco US

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.