Another election season has come to an end. While there are opposing feelings about the outcome of the election, I think everyone agrees that they are happy it is over…and the holidays are not far away to help distract us (minus those pesky Thanksgiving political conversations)!
With that said, it is hard for this post-election period not to feel like a strange blend of Groundhog Day meets Back to the Future as we are faced with a familiar cast of characters and echoes of past events. However, this time around I think we are all much less surprised by the hyperbole, and moments that may have been shocking before almost feel like old reruns, as if we have lived these scenarios many times before.
Yet, like Marty McFly revisiting past events in Back to the Future, even though the events and faces might look the same, we know that subtle changes and shifting dynamics can lead to very different outcomes. Or as everyone in the financial world will remind you with a mandatory disclosure.…past performance is not indicative of future results.
Market Reaction
The stock market’s reaction post-election has also been very familiar. This time we saw the largest one-day return after a presidential election at 2.5%, but interestingly, the last election following Biden’s win was also the largest 1-day post-election return (at that time) at 2.2%
Historically, markets tend to respond quite positively post-election, barring major outside factors. Since 1950, the median return of the S&P 500 from election through the end of the year has been 3.5%, and it has been positive 66% of the time (12 of 18 elections). Interestingly, in all those election years, November was the best month of the year on average, followed by December which was tied for 2nd best. October, the month leading up to the election, was the worst on average. This seems to suggest the markets might be less concerned with the actual election result and more interested in a sense of clarity…or like most of us, just happy for election season to be over!
One unusual aspect this year was the strength of the market going into the election but the incumbent party not winning. Historically, stock market returns in the 3 months leading up to election day have been a great predictor of who will win (with a positive return indicating a win for the incumbent party, and a negative return predicting a loss). In fact, prior to this year, the return for the S&P 500 in the 3 months prior to the presidential election had correctly predicted the winner in 20 of the last 24 elections. This year, with the S&P 500 up 11.5% over that time, it was the strongest 3 months leading up to a presidential election since Herbet Hoover in 1928. Again, the lesson here of course is…. past performance is not indicative of future results.
Implications
As is the routine after every election, from now until at least the inauguration, we will all be bombarded with commentary from market prognosticators attempting to tell us what this means for the markets and the implications for each sector. I hope you’ll see that this is not my attempt…which is actually quite the opposite.
While these forecasts can make for entertaining reading (if you’re into that sort of thing), history shows us time and time again that these are extremely unreliable. Not only are commentators terrible at predicting the impacts policies will have on markets, but initial short-term reactions of the markets themselves are often fleeting signals for the future. The sectors that respond most favorably to a certain election outcome based on policy expectations rarely benefit to the degree initially expected.
As you can see in the chart below, chasing the markets’ initial reaction to an election is generally a losing game. Often a coin flip could produce a better result. The chart below shows the top three performing sectors of the S&P 500 following each election since 2000, from election day through inauguration day (there are 11 sectors in all). It then shows whether that sector continued to outperform from that point through the next mid-term election or until the next presidential election day.
As you saw, while there are some instances where performance chasing worked, there are many other instances where it failed spectacularly. It is true that all three top performing sectors from election day to inauguration day after Biden’s election went on to outperform the S&P 500, and while not shown here, they also all ended up being the top three sectors until the election we just had. But that is rarely the case.
After Trump’s election in 2016, none of the top three performing sectors post-election went on to outperform the S&P 500 through the next mid-term, let alone the next presidential election. In fact, two of the sectors (financials and communication services) went on to be among the three worst performing sectors of his term (joined by energy, which was the worst performing sector).
Similarly, during Obama’s first term, none of the three sectors that performed best post-election went on to outperform. Again, similar to Trump’s term, two of those sectors (utilities and health care) were among the three worst performing sectors.
Initial market reactions to elections are notoriously unpredictable and often turn out to be misleading. Investors and traders frequently react impulsively to assumed policy changes or ideological shifts, only to adjust their expectations as actual economic data and policy realities begin to unfold. Long-term global economic trends, interest rates and corporate earnings ultimately carry much more weight over time.
Divided vs Unified Government
With Trump taking office and Republicans in control of both the House and the Senate, we’re entering what many call a period of “unified government”. Understandably, some may wonder how the markets generally respond to this sort of configuration. You may have come across charts like this…
As this shows, unified governments since 1950 have on average produced slightly lower returns than divided ones, with unified republican governments being the lowest. However, I think it is important to point out that these sorts of numbers are easily impacted by differing start dates or even interpretations of which years to include.
For instance, if you go back even further and include the 1920s then this changes the picture dramatically as the “Roaring 20s” were a unified Republican government period. Also, small changes to methodology can impact results, like how to deal with years like 2001 when a Republican senator switched to independent mid-year, ending Republican control. Since 2001 was a negative market year, this can make a difference, underscoring the fact that these numbers are not statistically significant.
A more unusual historical trend that Trump will be up against is the trend of recessions starting during Republican presidencies. In fact, 12 of the last 14 recessions started under Republican presidents, with a recession starting under every Republican president going back to Calvin Coolidge in the 1920s (with the exception of Gerald Ford, whose term was abbreviated as he took over from Nixon).
Trump was on track to buck this recession anomaly during his last term until the pandemic blindsided the economy, showing that economic cycles are impacted by things far out of a Presidents control.
Policies
When it comes to campaign promises, it’s important to remember that they probably have a worse historical track record of being fulfilled then the predictions of the market commentators…although maybe this is because market commentators put too much weight on campaign promises to begin with!
It’s easy to forget Trump’s first term campaign pledges around building a wall, repealing and replacing the Affordable Care Act (Obamacare), and conducting large-scale deportations. The reality is only approximately 80 miles of new border wall were constructed where none existed before, while he pledged 1,000 miles….and it’s worth noting that Mexico never paid for it, which was another campaign promise.3
Additionally, Trump had a unified government during the first two years of his previous term, as it appears he will have now, yet the Affordable Care Act remained largely intact due to a lack of support from fellow Republicans, only a few minor adjustments were made.
While Trump’s claims around large-scale mass deportations have become much bolder this time around, and while he claims new legal means to accomplish it, it is worth remembering that during his first term deportations were actually down from Obama’s and even Bush JR’s years in office.4 (people often forget that Obama was criticized for the number of deportations that took place while he was in office).
Ultimately, while Trump has a unified government, this doesn’t guarantee he can pass every policy he proposes. Many issues, such as deportations, are even controversial within his own party as many representatives have constituents who rely on this labor force. While Trump may attempt executive actions to bypass Congress, these could still face legal challenges and disregarding others in his party could potentially affect his ability to advance other policy priorities.
With all this said, when it comes to fulfilling campaign promises, the historical track record of presidents is not great. But….say it with me….past performance is not indicative of future results.
Embracing the Familiar, Expecting the Unexpected
As we move past the election, we find ourselves in a blend of the familiar and the unknown. It’s essential to remember that the past offers lessons but not blueprints. Every year has its own nuances shaped by recurring themes and completely unexpected events. The future is ultimately unknowable.
This is why a diversified portfolio is so essential. Diversification allows us to embrace a variety of market environments, whether familiar or unexpected. While diversification does not eliminate risk, it helps manage that risk by spreading investments across asset classes, sectors and geographies.
It’s important not to let the illusion of certainty lure you away from the principles underlying a robust portfolio. It’s easy to think that what has worked best, will continue to work best. Unfortunately, the ideal portfolio in one environment, almost by definition, cannot be the ideal portfolio in a different environment. In an unpredictable world, diversification grounds us in a steady foundation, prepared for whatever lies ahead.
As always, we thank you for your trust and should you have any questions don’t hesitate to reach out.
Adam Jordan, CIMA®, AAMS®, IACCP®
Director of Investments/ CCO
Opinions expressed are not intended as investment advice or to predict future performance. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. No investment strategy can ensure profits or protect against loss. Diversification does not assure a profit or protect against loss in declining markets, it is a method to help manage risk. Past performance does not guarantee future results. Investors cannot invest directly in indexes Opinions about political, economic and market trends are based on current views and are subject to change without notice. References to specific indexes, sectors or asset classes are for informational purposes only and do no represent recommendations to buy or sell any security.
1 indicates if the sector outperformed the S&P 500 from inauguration day until next mid-term election.
2 indicates if the sector outperformed the S&P 500 from inauguration day until the next election day.
Biden: Election Day 11/3/2020, Inauguration Day 1/20/2021, Mid-term election day 11/8/2022, Next Presidential Election Day 11/5/2024
Trump: Election Day 11/8/2016, Inauguration Day 1/20/2017, Mid-term election day 11/6/2018, Next Presidential Election Day 11/3/2020
Obama (2nd term): Election Day 11/6/2012, Inauguration Day 1/21/2013, Mid-term election day 11/4/2014, Next Presidential Election Day 11/8/2016
Obama (1st term): Election Day 11/4/2008, Inauguration Day 1/20/2009, Mid-term election day 11/2/2010, Next Presidential Election Day 11/6/2012
Bush Jr (2nd term): Election Day 11/2/2004, Inauguration Day 1/20/2005, Mid-term election day 11/7/2006, Next Presidential Election Day 11/4/2008
Bush Jr (1st term): Election Day 11/7/2000, Inauguration Day 1/20/2001, Mid-term election day 11/5/2002, Next Presidential Election Day 11/2/2004
3 www.nbcnews.com/politics/donald-trump/fact-check-mexico-never-paid-it-what-about-trump-s-n1253983
4 econofact.org/immigrant-deportations-during-the-trump-administration
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