As we get to the back half of 2020 one thing we can say with complete and emphatic certainty – there’s been a lot of drama this year. I certainly don’t mean to downplay the severity of COVID-19. It is terrible. And, we continue to pay a dear price in lives affected both physically and economically.
We do have another bit of drama left to play out this year and it’s a doozy. The 2020 presidential election. To quote my daughter, “It’s a hot mess.”
I have no interest in promoting any political party in the course of my work or writings. Wealth managers should view markets and investing in an agnostic manner. We review the data at hand, and that may influence our decisions, but we have a lengthy view and understand that along the way parties change.
Be sure to put your feet in the right place, then stand firm.Abraham Lincoln
This quote from Abraham Lincoln is a truth that gives staying power to our decisions and efforts. Sticking with truths, let me share some truths no matter who wins the election.
Markets have performed well under both parties.
The S&P 500 index delivered an average annual return of approximately 11% over the past 75 years, through both parties’ administrations. During that same period, the economy expanded by around 3%(1). Neither party can boast a superior economic or financial market performance.
We do not radically re-engineer the US economy.
The biggest fear among investors is that a progressive candidate might make a radical change in the economy. Remember, all presidents also need control of the Congress. This checks and balances system resulted in the last two presidents getting one signature achievement before losing the House. And despite concerns about major policy changes, business investment and government spending have been remarkably consistent as a percent of GDP.(2)
The historical narrative is not always as you remember it.
We often draw on the past to make decisions on the future, but we don’t always get the history right. Here are a few “surprises.”
- Jimmy Carter presided over significant job growth.
- Under Reagan, income for those in the 50th percentile ranked by income grew by almost 20%.
- During Obama’s presidency, despite concerns that his policies would cause massive inflation, the US had one of the longest deflationary environments on record.
- Under Trump, capital expenditures have been below their historical growth rate, even in the aftermath of a large corporate tax cut.(3)
Monetary policy matters more.
For all the focus put on the executive branch I would argue the that monetary policy matters more. The adage holds true: Don’t fight the Fed. Historically, presidents have been hurt or helped by the Federal Reserve. Both Reagan and Clinton benefited from falling rates. Both George H.W. and George W. Bush were hurt by Fed tightening. Obama befitted from a benign environment. And Trump’s first two years found a tighter policy.(4)
Markets don’t care if you don’t like who’s president.
The market can do well whether you like the president or not. Some of the best returns came when the presidential rating was in the low range of between 36% and 50%.(5)
That means the market delivered some of its best returns when half or more of the country didn’t approve of the current administration. Still, it’s hard to discern any direct relationship between the president’s popularity and the health and overall performance of the economy.
This is, in fact, not the most vitriolic election. Really.
Let’s look at the media not playing it straight through a historical lens.
Newspapers were filled “with all the invective that disappointment, ignorance of facts, and malicious falsehoods could invent to misrepresent my politics.George Washington
Nothing can now be believed which is seen in a newspaper. Truth itself becomes superstitious by being put into that polluted vehicle.Thomas Jefferson
And finally, you think the ire and nastiness today is at a new unparalleled high? Remember back when Vice President Aaron Burr and former Treasury Secretary Alexander Hamilton had a vendetta, they settled it on the cliffs of Weehawken (with dualling pistols!), ultimately resulting in Mr. Hamilton’s death. As long as it stays on Twitter, believe it or not, we’re on a higher level.
- Invesco, real GDP data, S &P
- Fred-global financial data
- Bureau of Labor and Statistics, Bureau of Economic Analysis
- Goldman Sachs, Bloomberg
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DISCLOSURES: The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.