Volume 90 No. 5 - May 2019
We have entered election season. For the next year-and-a-half, we will endure the histrionic antics of politicians who are concerned more with their polling numbers, social media followings, and campaign contributions than about the US and its economy. Scandals will emerge and fade. Candidates will get their 15 minutes of fame. News outlets will sensationalize coverage to keep you watching and clicking so they can maximize their ad revenue. It is easy to get caught up in the fray, but in the end, does any of it really matter to the markets, and to the economy in general?
The answer, concisely and clearly, is no.
What Will Happen on Wednesday, November 4, 2020?
The answer here, of course, is that no one in 2019 knows. However, all of the rampant speculation and grandstanding may impact the markets – in the short-term. The country, goaded on by the media, will speculate about what will happen to in-force economic policies, and the impact that leaving them active or overturning them will have. That uncertainty may cause the markets to dip as some investors try to protect short-term gains and flee the markets for the comparatively safer ground of real estate, precious metals, or even savings accounts. But, they will come back, and the markets will continue on as they always have, with equities whose prices are set by fundamentals and overall market dynamics and not by what the major news networks said someone else said yesterday. In all of this, there is one important point to remember:
Politics Aren’t As Relevant to Company Earnings as the Press Would Have You Believe
If a stock’s value basically reflects the cash a company will generate during its lifetime, the market is simply the sum of all its stocks. The markets care about money, and stocks reflect investors’ beliefs about that money. While the markets may not react directly, long-term, to the identity and party of whoever sits in the Oval Office, they do price in the impact of policies, both those in place and those which may come to be. Some of those policies may impact the earnings of public companies. Therefore, they do play into market performance and the values of individual stocks.
We’ve been here before…
Every election season is unique and it is difficult to separate market reactions to election results from other underlying issues of the day. However, markets, in the short-term, do not like uncertainty. More than caring which candidate ultimately wins the White House, the markets react more to the uncertainty surrounding the policies a president might pursue. Presidents can bring new tax rules and new regulations, which could have an impact on operations and profits of companies whose equities trade in the US public markets. But, what we have to remember is that this uncertainty is short-term, while a buy-and-hold investing strategy takes a long-term perspective. While a presidential election determines who holds the White House for the next four years, investing for the long-term goes far beyond that.
If we were to examine S&P 500 returns during each election year since 2000, we would see that three of five times, the S&P 500 increased during an election year, or, alternatively, the index decreased during the other two. Stripping away the complexities of the behavioral finance theories that could be the subject of several newsletters, it’s important to note that the ‘down’ election years were 2000 and 2008, and that the winning candidates were from each of the parties, a Republican and a Democrat, respectively. Prior to the 2000 election year, you have to go back to 1940 to find an election year when the S&P last finished down. During those 60 years, a lot obviously happened, and many factors beyond presidential elections and which party held the White House factored into market performance. What’s important to take away from this brief analysis is that the market, in the long-term, looks beyond the President and at the policies and events that impact market and public company performance.
Even in extreme cases, where a president entered the unprecedented territory of potentially being removed from office, short-term economic shifts were largely (and comparatively speaking) erased by longer term economic trends. Twenty years ago, while the Clinton-Lewinsky scandal took over that era’s 24-hour news cycles, Bill Clinton was impeached in mid-December 1998. Through the issuance of that era’s long-awaited Starr Report, the announcement of Bill Clinton’s impeachment, and his eventual acquittal some five months later, the S&P experienced volatility, but ultimately ended close to its all-time high … and just 3% higher than it was the summer before it all started. If we look back further, to the 1970s, when the impeachment of President Nixon did lead to his resignation from office, the markets reacted much more to the era’s fundamental economic drivers, i.e., inflation and the oil embargo, than to his departure.
One event that caused far more havoc in this timeframe, for example, was the bursting of the dot-com bubble. Fueled by speculation, infatuation with anything dot-com, and a willful ignorance around key investment benchmarks like profitability, the late-90s, tech-heavy NASDAQ rocketed straight through the Starr Report, Clinton’s impeachment, and his eventual acquittal, growing more than 40% between September 1998 and February 1999. By the time the dot-com bubble stopped bursting in October 2002, however, the NASDAQ rested at just 22% of its peak two-and-a-half years earlier.
The Bottom Line: There Is No Magical Crystal Ball
People speculate. It’s our nature. The markets are inventions of people. While speculation surrounding the 2020 election excites the news media and provides good fodder for clickable news stories and workplace debates, it does little except to introduce short-term volatility to the long-term ebb and flow of the financial markets. What drives much more lasting change and movement are the fundamentals behind the stocks, earnings, and projections of the companies whose equities form the markets. So, while none of us know who will be president on January 20, 2021, we do know that the market will continue to reflect the underlying fundamentals of its component companies, and investors’ expectations of what the future will hold for them – formed by the in-force policies, politics, and regulations that may impact those companies. In short, ignore the noise, and focus on the fundamentals. See past the volatility that drives short-term trading, and watch the trends that influence the true long-term movements of the markets.
Investment Counsel Inc. is a registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.