Asset Allocation Bi-Weekly – Presidential Cycles and Stock Performance (9/30/24)

With the presidential election coming up, we will consider a timely topic this week: Does the stock market prefer one of the two major political parties? Confluence Associate Market Strategist Thomas Wash joins Phil Adler to take us on a trip through recent history. 

What is Confluence Podcasts?

Podcasts from Confluence Investment Management LLC, featuring the periodic Confluence of Ideas series, as well as two bi-weekly series: the Asset Allocation Bi-Weekly and the Bi-Weekly Geopolitical Report (new episodes posted on alternating Mondays).

Phil Adler: 00:04

Welcome to the Confluence Investment Management biweekly asset allocation report for September 30, 2024. I'm Phil Adler. With the presidential election coming up, we will consider a timely topic this week, which is, does the stock market prefer 1 of the 2 major political parties? Confluence associate market strategist Thomas Wash joins us today to take us on a trip through recent history. 1st, Thomas, what do statistics tell us about stock market performance during 4 year terms of Republican and Democratic presidents?

Thomas Wash: 00:42

Thank you for having me today. The data indicates that presidential party affiliation might have a more limited impact on equity markets than commonly believed. Analyzing the S and P 500 since 1930, we found that both Republican and Democratic presidents have achieved substantial returns with each party averaging over 30% during their 4 year terms. Now Republicans have slightly outperformed Democrats by a 2% margin. However, this difference is statistically insignificant.

Phil Adler: 01:13

Well, there is often a a sharp contrast between the policies of the political parties. Why have the stock market results over a 4 year term been so similar?

Thomas Wash: 01:25

Well, despite campaign promises to transform Washington, you know, newly elected presidents often encounter significant challenges. You know, economic downturns, particularly recessions, can significantly constrain a president's agenda. Moreover, the composition of Congress plays a crucial role. While a unified government where one party controls both chambers and the presidency can facilitate legislative action, it's not always guaranteed and remains the exception rather than the rule. Another factor that could influence stock performance is monetary policy which is independently determined by the Federal Reserve.

Phil Adler: 02:00

Thomas, let's dig into these statistics a little bit more. How do stock markets historically perform during election years like the one we're in right now?

Thomas Wash: 02:12

So during election years, the equity markets performance can be significantly influenced by the prevailing economic climate. Historically, equity markets have shown a tendency to underperform in years when Democratic candidates win the presidency. This trend can be attributed to the fact that many Democratic presidents have assumed office during or shortly after economic downturns leading to increased market uncertainty about potential policy shifts. Now conversely, Republican presidents often win in years when the economy is still growing. As a result, market sentiment is generally higher.

Phil Adler: 02:47

So would you call this year's rally an outlier?

Thomas Wash: 02:52

Kind of. You know, this year's rally deviates from past elections primarily due to the heightened market focus on monetary policy. Many investors have eagerly awaited a soft landing, hoping for signs of a Fed cut before a potential recession. Furthermore, the AI hype has provided a significant boost to equity, especially in the early part of the year. As investors, you know, seek these higher yields, tech companies have benefited greatly from that trend.

Thomas Wash: 03:19

While the election remains a factor for investors, it appears to be a secondary concern at the present time.

Phil Adler: 03:27

Well, come January, we will have a different president. How about the 1st year of a of a new president? Are there different market tendencies historically under a democratic and republican president during the 1st year of the term?

Thomas Wash: 03:42

Well, our research kind of indicates that democratic presidents often outperform their Republican counterparts in the early part of the year, but they ultimately face the same fate of stagnation. Now this pattern is largely driven by economic conditions. You know, Democratic administrations typically begin the year with fiscal and monetary stimulus as they try to respond to the struggling economy. With this mandate to boost spending and monetary policy to ease or support the recovery, these early gains eventually taper off.

Phil Adler: 04:15

In the 2nd year of a term, midterm elections can cut into a president's influence. Does the stock market tend to stagnate during the 2nd year of a of a term no matter which party holds the presidency because of uncertainty over midterm elections?

Thomas Wash: 04:32

Yeah. That that's that's the only true for elections. During midterms, the opposition party is often more motivated to vote, while the winning party sees less urgency to turn out. This gives the opposition an advantage. In terms of equity performance, this tends to favor Republicans who typically lose fewer seats, allowing them to maintain their policies more effectively.

Phil Adler: 04:53

Let's move on to the 3rd year of a presidential term. What are the stock market's tendencies under Republican versus Democratic administrations during the 3rd year?

Thomas Wash: 05:03

So the 3rd year of an administration often marks a period of peak performance and political gridlock. While both the ruling party and the opposition tend to demonstrate their greatest strength during this time, the upcoming general election often leads to increased opposition efforts to hinder the administration's agenda. This political stalemate can create a more stable and predictable environment for investors as the likelihood of major legislative changes is generally reduced.

Phil Adler: 05:30

Thomas, what conclusions do you draw from all these statistics? And and what should investors keep in mind as rhetoric over economic policy heats up heading into November?

Thomas Wash: 05:42

Our research indicates that our investors should prioritize assessing a president's economic circumstances upon inauguration rather than solely focusing on their policy proposals. For example, during economic downturns, a president's primary objective will be to stimulate the economy. High inflation and interest rate can also adversely affect market sentiment. Additionally, the composition of congress significantly impacts policy outcomes. While a divided congress may result in policy gridlock, it can also provide a degree of stability and mitigate the risk of extreme policy changes.

Phil Adler: 06:17

We've been looking back during our discussion and considering market history. Now as we consider our investments, can you at this point identify anything markedly different about market conditions or policy proposals this time around that might cause a break from history and a departure from past statistics during the presidential term coming up?

Thomas Wash: 06:38

Well, you know, there is this growing hostility toward global trade, and it is likely to significantly influence policy going forward. Former president Donald Trump's preference for tariffs and vice president Kamala's inclinations towards industrial policy may converge in their ultimate goal of promoting domestic production. Despite potential differences in their approaches, both figures are likely to support policies that encourage onshoring, reflecting the nation's desire for greater self sufficiency, especially as it grows distrustful of the rest of the world.

Phil Adler: 07:10

Is it fair then not to expect major changes in Confluence Investment Management asset allocation recommendations in the week or two following election day?

Thomas Wash: 07:20

We believe that the impact of any policy differences in the scheme of things will be relatively minor and that the incoming president's inherited circumstances will be more influential than their individual policies. As we move into the new year, the composition of congress and monetary policy will likely be more significant factors. Concerns about the labor market and potential resurgence of inflation are expected to remain top market priorities.

Phil Adler: 07:44

Thank you, Thomas. Our discussion today is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security. Our audio engineer is Dane Stoll.

Phil Adler: 08:02

I'm Phil Adler.