What history tells us about politicians' influence over equity markets
While presidents are always quick to take credit for strong stockmarket performance while being quick to blame their predecessor for poor performance, history indicates they are likely responsible for neither
As the US mid-term election results appear to show a close contest for control of Congress, many investors may be thinking about how politics can influence market performance.
History shows that markets have tended to perform better under Democratic presidents than under Republicans – ignoring who is in control of the House and the Senate. In aggregate, over the last 90 years, markets have gained more than 370 per cent under Republican presidents compared to 724 per cent under Democratic presidents. While presidents are always quick to take credit for strong performance and quick to blame their predecessor for poor performance, history indicates that they are likely responsible for neither.
The might of macro
The performance of the S&P 500 Index during president Joe Biden's two years in office shows how, more often than not, it is beneficial to consider macro conditions and their ability to hold more influence over the market, as opposed to specific legislation or policy.
It is always difficult to tie any legislation directly to economic and market outcomes. The underlying macro and micro forces at work are much better explainers of stock prices and the trajectory of the economy.
In Mr Biden's first year in office, the S&P 500 recorded a gain of 38.3 per cent, the best election anniversary performance of this index for the first term of any president since 1932. The stellar increase in the S&P 500 followed the start of the vaccine rollout in November 2020. In the span of a year, the US economy and corporate earnings went from a depression-like bust to a wartime-like boom. Companies cut operations to the bone amid the early phase of the pandemic; then, courtesy of record-breaking monetary and fiscal stimulus, the economy quickly found its footing. As a result, the S&P 500 index went on a seven-month stretch of consecutive positive performance in 2021 up until September.
However, two years after Mr Biden’s election victory the bill for the economic stimulus is coming due. The post-pandemic stimulus has ended, inflation has soared, and the Fed began implementing quantitative tightening.
As a result, markets have struggled. The S&P 500 has fallen back from the exceptional rise seen during his first 12 months in office. Overall, market gains since Mr Biden's election have been more than halved to just 14.9 per cent. This means Mr Biden now ranks just 13th out of the previous 15 presidents, only ahead of Richard Nixon and George W. Bush.
Clouds on the horizon
Following the mid-terms, macro-conditions may still be difficult for investors to navigate. Based on the plunge in the Conference Board's CEO Confidence, the risk of recession is high, and earnings are in danger of moving into negative year-over-year territory before long.
The most important messages from the third-quarter earnings season are weakening demand, high production costs including labour, the effects of the strong US dollar and the impact of the Fed's aggressive rate hiking cycle. Of note is the breadth of hits in terms of industries – with not only technology feeling the pressure, but also housing, autos, communications – and especially those segments of consumer and retail that were the biggest beneficiaries of the stimulus-fuelled early stages of the pandemic. Asset owners are now feeling sharp pain from the "everything" bear market, while most consumers' spending power has dwindled under persistently hot inflation.
In current conditions, investors should stick to diversification and rebalancing within financial plans. Now is not the time to take undue risk, and investors should seek out high-quality segments of the stockmarket with strong balance sheets, positive earnings revisions, and healthy profit margins.
While the outlook may appear bearish, the long-term trend shown in this research is that the strength of the US economy has delivered exceptional returns for long-term investors. Overall, the S&P Index has surged more than 53,000 per cent in the past 90 years.
Richard Flynn is managing director of Charles Schwab UK
