Markets Historically Strong Before an Election

Market Update 2020-10-12.

Equity markets rose last week by with the S&P 500 up 3.8%. All sectors were green. Energy led the pack for once, as Hurricane Delta’s track lifted oil prices above $40. Bank and technology stocks posted nice gains. Interest rates rose helping banks and consumer discretionary groups.  Ongoing talk of second fiscal stimulus program led to a steeper yield curve and economically sensitive stocks led.

Elections and the markets

Stats: as we have discussed for months, the election outcome should be third or fourth on the list of investors’ worries. Historically, the year before the election year has been the strongest of the cycle. Since 1951, the S&P 500 has posted an average yearly return of almost 17% in those years (versus 9.0% for all years), with more than 88% positive. In this case, 2019 obviously fit the bill, with the index surging almost 29%. Even in the very few negative pre-election years, the S&P 500 has never fallen more than 1%, while there have been a handful of massive 25%-plus gains (1955, 1975, 1991, 1995, 2003 and 2019).

Stats: the election year itself has tended to slow considerably, but with a still-high positive return rate.  This cycle, post both 2012 and 2016 elections, in which alternate parties governed, the S&P 500 rose almost exactly the same percentage of the pre-election Q3 lows, +38% off its Q3 lows.  Moreover, the markets rose over 20% above its prior all-time highs over the next 15 months after the election.  Additionally, with investor actions similar to this year (huge outflows from equities) , the market has average over 20% the next year.  Since 1988, markets average a 21% annualized return when consumer confidence climbed to above average while investor confidence stayed this low per data compiled by the Leuthold Group.

Politics and bull markets

More stats: with respect to Congress, a unified government where the White House, Senate and House are all under one party’s control, has produced better than 10% on average. Divided government has been slightly weaker. Unified government took place in 2003/04 and 2009/10, as the tide was shifting from recession to bull market.

More stats: for what it is worth, Democrat Presidents have outperformed Republicans by 11.6% to 6.9%. Again, circumstance plays a big role here—the Dems caught the 1990s tech boom and took over just as the record post-financial crisis bull market was setting off. The Republicans caught the late-1960s peak and a nasty decade for stocks.  What really matter behind the scenes is what the Federal Reserve is doing with monetary policy.

Economy

On the data side, U.S. home price growth continued to accelerate, up 0.6% in July according to Case-Shiller; pending home sales popped almost 9% in August (thank you Millennial demand); consumer confidence jumped 15 points by the Conference Board’s measure for September (thank you stock market recovery); and real personal spending jumped a strong 0.7% in August (thank you Q2 stimulus checks from Congress). Meantime, headline payroll growth missed expectations at +661k, entirely because of government cuts. Private-sector jobs topped the mark with an 877k increase, which lowered the jobless rate 0.5 ppts, to 7.9%.

Resources

  • Our complete second half outlook has been also posted and can be found by clicking here.

 

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