NAVIGATING MARKET TRENDS THROUGH PRESIDENTIAL ELECTIONS Feb 2024
Do Presidential Cycles Matter For Investors?
Since 1944, there have been 16 years in which an incumbent president has run for re-election. In all 16 years, the S&P 500 finished higher. The reason is simple: if the economy is doing well, jobs are plenty, and consumers are confident, the odds of an incumbent president winning re-election are high. In fact, every president who presided over a recession during the first two years of their term failed to win re-election. Economic performance consistently ranks highly among voters when considering who to vote for in elections.
Presidents have many direct and indirect tools at their disposal to ensure the economy is running smoothly. The primary fiscal tools are tax rates and government spending, which can be used to provide support when the economy is performing below trend. More recently, the government has reduced tax burdens for individuals and corporations through tax rate cuts and tax credits, accelerated spending on infrastructure projects, and provided extra welfare and unemployment benefits. Historically, these tools tend to be deployed in the third year of a presidential term because there are lag effects between policy implementation and their intended outcomes. Consequently, we believe stock market returns tend to be best in the third year, while GDP growth is best in the election year. We acknowledge that we are making inferences from data that may be random. Still, there are enough data points that suggest incumbent Presidents grease the economic wheels to improve their odds of being reelected.
YEAR 3 RETURNS ARE BEST FOR ‘NEW’ PRESIDENTS
ELECTION YEAR GDP GROWTH IS STRONGEST
HOW DO DIFFERENT SECTORS PERFORM?
Election year sector performance is inconsistent as major policy issues differ from election to election. A significant policy position in one election can be (and is often) a non-factor in the next election. For example, recent data from Strategas Policy Outlook reveals that healthcare, a focus in recent elections, has been the worst-performing sector in four of the past 12 presidential election years. And in the other eight election years, healthcare was never the best-performing sector. Technology typically lags in election years but is the best-performing sector in non-election years, while energy and financials perform better in election years. However, these relative gains are generally short-lived as finance and energy are two of the worst-performing sectors in non-election years.
Further complicating a sector-level analysis is that partisan political patterns are inconclusive. One may posit that the energy and financial sectors would outperform other sectors during a Republican incumbent election year – and this is true in the short-term – but these gains don’t persist. In reality, many sectors perform similarly leading up to an election, perhaps because the winner is uncertain. Ultimately, the data reveals no material differences between sectors one year after the election. Of course, this makes sense, given the equity market is made up of various companies whose prices are determined by earnings growth and profitability rather than political factors.
WHAT DO WE MAKE OF ALL THIS?
Most experts do not associate a strong correlation between S&P 500 performance and the political landscape. Political commentary can influence markets or sectors, but disciplined investors ignore the “noise” and focus on fundamental finance metrics instead. Especially since sector composition can change as new industries emerge while others fade. We are not in the political election forecasting business and as such, don’t build client portfolios for specific presidential outcomes. Instead, our focus is on building all-weather portfolios that don’t rely on a certain political or macroeconomic outcome. Equity markets correct every year, and we doubt this year will be any different. Importantly, market timing is difficult and can be costly. A recent Legg Mason study suggested that from 2000 to 2020, the average annual return of the S&P 500 was 6.07%1. During those 20 years, there were 5,036 trading days; if an investor missed only 10 days, investor returns were cut in half. Market rebounds tend to be sharp, happen unexpectedly, and generate strong short-term returns, leaving market timers behind. When markets correct, we prefer to add equity exposure because over the long-term, the S&P 500 has a 100-year+ track record of delivering ~10% average annual returns when dividends are reinvested.
1. Legg Mason. The Cost of Timing the Market. https://www.franklintempleton.com/planning-and-learning/learn-about-investing/investing-principles/cost-of-timing-the-market
*Graph sources can be available upon request.
Disclosures: Miracle Mile Advisors LLC (“MMA”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where MMA and its representatives are properly licensed or exempt from licensure. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of MMA’s strategies are disclosed in the publicly available Form ADV Part 2A. Values are approximate. The above example assumes a California resident, resulting in full realization of State capital gains tax.