If You’re Making Investment Decisions Based on the Election, Don’t…

There is a long-held belief by investors that the President of the United States’ political party has a big impact on the stock market. The belief is that Democrats are bad for the market and that Republicans are good for the market. The truth is, since World War II, the market has performed better under Democrats than Republicans. But that doesn’t mean there is a cause and effect relationship there.

An article from Forbes back in July evaluated each president back to Harry Truman and the top two performances came under Democratic administrations. Bill Clinton saw the S&P gain 210% while he was in office and Barack Obama saw the index move up 182% while he was in office. Conversely, the two worst results were both under Republican administrations. George W. Bush saw the S&P drop 40% in his eight-year term and the index fell 20% during the five-year term of Richard Nixon.

Before anyone starts to think that they should vote for Joe Biden in November simply because the returns we saw under Presidents Clinton and Obama, let’s take a look at the circumstances behind the gains.

President Clinton was fortunate to be in office during an incredible expansion in technology. I was thinking about how much things changed in the early 90’s, as far as my own work environments. In 1990 I was working at a brokerage firm where I shared a Quotron with the guy in the cubicle next to me. Our “computer” sat on a Lazy Susan of sorts and we could swivel it back and forth as needed. Keep in mind the only thing a Quotron did was get you stock prices and some financial news.

By 1994 I was working for a regional bank in customer service area and every single workstation had its own computer. With these computers we could do almost everything for a customer—make a payment, transfer money, look up all of their transactions, etc. Within a few years I was working as a branch manager and all of our computers had internet capabilities.

The stock market benefitted greatly from the tech boom that happened in the early 90’s and the internet industry was still in its infancy. By the mid-90’s, the internet boom was really starting to hit its stride and then in the late 90’s everyone was replacing their hardware and software because of the Y2K concerns, creating yet another boost in tech sales to drive the market higher.

All of this took place while Bill Clinton was in office—the initial tech spending boom, the internet industry becoming mainstream, and the tech replacement cycle that occurred because of the new millennium. Did any of that have to do with the fact that that Clinton was a Democrat? Of course it didn’t. He was in the right place at the right time.

The Slowdown After the Boom

Flash forward to 2001 when President Bush took office and now we are seeing a big slowdown in tech spending. Well of course we are because everyone upgraded their hardware and software in 1999. Even before the election in November 2000 we were starting to see cracks in the bull market that we had been in for years. From August 2000 through October 2002, the S&P would lose 45% of its value.

President Bush had gotten a tax cut pushed through Congress and he had helped bring the country together after the 9/11 attacks. Despite his best efforts, the market still took a nosedive. Did that have anything to do with him being a Republican? Of course it didn’t. As fortunate as Clinton was to be the president when he was, Bush was just as unfortunate to president at a time when the economic cycle was bound to see a contraction.

The market started rebounding in 2003 and it did pretty well until 2007 when the financial crisis started. The booming housing market that was generated with a growing population and low interest rates created the “housing bubble”. Did Bush’s fiscal policies help create the boom? To some degree they did, but that isn’t what created the financial crisis. The term “too big to fail” became all too familiar to the majority of people. Banks had ventured in to trading, insurance, investments, etc. This created institutions that held far too much importance in various aspects of the financial system.

There was a piece of legislation that passed in 1999, under the Clinton administration, that allowed the process of banks expanding their reach in the financial industry. The Gramm-Leach-Bliley Act went in to effect in November 1999 and it repealed the Glass-Steagall Act that had limited bank operations since 1933. This change in legislation was a huge contributing factor in why the financial crisis was so bad and why the market dropped so greatly. Was this President Bush’s fault? Not really, and it also didn’t have anything to do with him being a Republican.

So now we have been through two bear markets in less than eight years and George W. Bush has been president during both. At the end of the financial crisis, we have seen legislation passed to bail out banks and auto manufacturers. We have also seen the Federal Reserve step in to cut interest rates to zero in late 2008. The target rate stayed at zero until late 2015. The bailouts and the low interest rates provided the necessary fuel to start the next big rally in the market.

The Next Phase in the Economic Cycle

Barack Obama took office in January 2009 after all of these moves had been made by Congress and the Fed. He was the beneficiary of being president while the Fed was incredibly accommodative. Did the huge rally during his eight-year term have anything to do with his fiscal policy? Maybe a little, but more credit probably belongs to the Fed’s monetary policies and the economic cycle.

The rally that started in the spring of 2009 continued through until it hit a rough patch at the end of 2015. The S&P moved sideways for a bit and then took off again in a trajectory that held until late 2018.

At this point we had transitioned to Donald Trump being president in January 2017. The market rally hardly changed its trajectory at all until the fourth quarter of 2018 and then it rallied right back until the COVID-19 pandemic hit this past spring. Did the rally from 2009 through 2018 have anything to do with Barack Obama’s fiscal policies? Maybe a little, but again the economic cycle and the Fed had a greater influence on the market.

The fact that the market hardly flinched when President Trump took over had little to do with him being a Republican. Sure he got the Tax Cuts and Jobs Act pushed through in late 2017, but that didn’t really change the trajectory of the S&P rally. It went in to effect in 2018. The act may have helped extend the rally, but it didn’t insulate the U.S. from a market correction in Q4 2018 and it didn’t help us when the global economy shutdown in Q2 2020.

When the market dropped so sharply in February and March ’20, it was a panic. It had everything to do with the uncertainty surrounding the COVID-19 virus and little to do with having a Republican president. The fact that the market rallied right back to new highs had more to do with the Fed once again cutting interest rates and Congress passing the first relief package. President Trump did help Democrats and Republicans shape the bill, so he does get credit for that.

Watch the Economic Cycle and Fed Policy

Personally, I am pretty neutral when it comes to politics. And as an investment analyst, I don’t really care whether the president is a Democrat or a Republican. I sure won’t be making my investment decisions based on which candidate has the lead heading in to the election in November. I am more concerned about where we are in the economic cycle and what the Fed’s policies are for the foreseeable future.

As we head in to the election, I think the winner is going to have a difficult time as we continue to deal with the pandemic and we haven’t had much of an economic downturn since the financial crisis. Sure we technically entered a recession in the second quarter as GDP shrank, but that was almost a self-induced recession as we shut the economy down in order to deal with the health crisis. That is not part of the normal economic cycle. It also doesn’t look like it is going to last very long, at least not in the eyes of many analysts and investors.

The Fed doesn’t seem to be much of a worry as they just announced earlier this week that they planned to keep interest rates low until at least 2023. They could still take additional measures to change monetary policy if needed, but the overall outlook for the Fed seems to be pretty accommodative.

My advice to investors is to make their investment decisions based on statistics and other analysis techniques and don’t worry about the election outcome. Keep an eye on the economic indicators and the Fed. These will help you prepare for the next recession and the next bear market.