PERSPECTIVES ON ELECTIONS AND U.S. EQUITY RETURNS 09... · 2020. 9. 16. · PRESIDENTIAL ELECTIONS...

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PERSPECTIVES ON ELECTIONS AND U.S. EQUITY RETURNSSEPTEMBER 2020

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PRESIDENTIAL ELECTIONS AND U.S. EQUITY RETURNS

• All elections are important, but to many investors, the coming election feels particularly weighty. The policy ramifications of White House and congressional outcomes can seem unnerving, especially given the wide policy differences and, in some cases, dramatic policy proposals (particularly, taxes).

• However, history suggests election results should not be the primary driver of investment decisions. This is particularly true now, where COVID and the related fiscal and monetary response are arguably much more important than potential.

• On a short-term basis, politics have the power to move markets and create stock market volatility; however, the relationship between politics and financial markets is not so clear cut. While there may be conventional wisdom in how each party’s policies will affect the economy, politics play only a small role in the direction of the economy and markets. Political checks and balances mitigate the impact of radical, transformational proposals. Plus, the impact of changes tends to evolve over time (often into the next administration).

• As illustrated in the following charts, markets have thrived through myriad political environments, often in unexpected ways. Long term, the fundamentals of earnings and interest rates, labor growth and productivity, and the mean-reverting nature of an independent monetary policy ultimately drive financial market returns.

• Clearly, policy changes can have ramifications for financial plans, tax strategy, asset location and estate planning. Those evolving policies are key inputs in our holistic approach to long-term wealth management. However, we do not advocate using predicted or actual election results as a significant factor in short- or intermediate-term asset allocation decisions.


MARKETS HAVE REWARDED LONG-TERM INVESTORS UNDER EITHER POLITICAL PARTYGrowth of a Dollar Invested in the S&P 500: January 1926–June 2020

Past performance is not a guarantee of future results and there is a possibility of loss. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

$0

$1

$10

$100

$1,000

$10,000

1926 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1989 1994 1999 2004 2009 2014 2019

Republican President

Coolidge

HooverRoosevelt

Truman

Eisenhower

KennedyJohnson

Nixon FordCarter

Reagan

Bush

Clinton

Trump

BushObama

Chart Source: Invesco: 2020 U.S. Election – 10 Truths No Matter Who Wins.


Eisenhower

Kennedy

Johnson

Nixon

Ford

Trump

ReaganBush

Clinton

G.W. Bush

Obama

Carter

-10

-5

0

5

10

15

20

25

1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5%

MARKETS HAVE PERFORMED WELL UNDER BOTH PARTIES

Sources: Haver, Invesco, 6/30/20. Note: President Trump stock market performance data from 1/20/17-6/30/20., real GDP data from 12/31/2016 to 3/31/2020 as GDP is reported with a lag. Stock market performance is defined by the total return of the S&P 500 Index. Index definitions can be found on page 12. Past performance does not guarantee future results and there is a possibility of loss.

Presidential Term Stock Market Returns vs. Economic Growth (1957-Present)

Annu

aliz

ed S

tock

Mar

ket P

erfo

rman

ce %

Annualized Real GDP Growth During Presidential Term Percentage


• Neither party can consistently be credited with superior economic or financial market performance.• The S&P 500 Index delivered an average annual return of approximately 11 percent over the past 75 years, through both Democratic and Republican

administrations. The U.S. economy also expanded around 3.0 percent during that period. • The stock market’s return was negative for a presidential administration only when the country was in a financial crisis (2008) or experiencing a stagflationary

spiral (1973).


HISTORICAL RETURNS AND GDP GROWTH

Past performance does not indicate future performance and there is a possibility of a loss.


MONETARY POLICY MATTERS MORE

Sources: Goldman Sachs, Bloomberg L.P., 6/30/20. See index definitions. An investment cannot be made in an index. Past performance does not guarantee future results.

Financial Conditions* and S&P 500 Performance During Easing Conditions

Fina

ncia

lCon

ditio

ns

S&P+227%

S&P+99%

S&P+217%

* A weighted average* of:” riskless interest rates; the exchange rate; equity valuations; credit spreads.

98

99

100

101

102

103

104

105


For all the focus put on the executive branch, it is monetary policy that matters more. Markets have done well during prior periods of easing financial conditions.

Currently, the Fed is providing policy support and is likely to keep rates lower for longer. As a result, we would expect the current environment to remain relatively supportive for stocks and the yield curve to keep steepening only modestly.


$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

$8,000,000

1900

1903

1906

1909

1912

1915

1918

1921

1924

1927

1930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

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1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

2020

Only Invested for Dems Only Invested for Reps Fully Invested

INVESTORS ARE BETTER OFF STAYING FULLY INVESTED

Sources: Haver, Invesco, 6/30/20. For illustrative purposes only. Index definitions can be found on page 12. Past performance does not guarantee future results and there is a possibility of loss.

Growth of $10,000 in the Dow Jones Industrial Average Since 1896


The best-performing portfolio over the past 120 years was one that stayed fully invested through both Democratic and

Republican administrations. “Partisan” portfolios underperformed.


Source: Jurien Timmer, FMRCo.

On average, returns in the third and fourth year of a presidential

term are stronger.

Differences in returns based on election outcomes tend to even out over a full term.

Dark Blue = first 2 years, Light Blue = 4-year term

Aver

age

grow

th o

f com

posi

te in

dex

Years of a presidential

term

Monthly data since 1789 (mix of S&P 500, Dow Jones Industrial Average and Cowles Commission). Source: FMRCo.

Average growth of com

posite index

The Presidential Cycle

Dark Blue = first two yearsLight Blue = four-year term

All

elec

tions

Rep

ublic

an

pres

iden

t

Dem

ocra

tic

pres

iden

t

Rep

ublic

an

swee

p

Dem

ocra

tic

swee

p

Rep

ublic

an

divi

ded

Con

gres

s

Dem

ocra

tic

divi

ded

Con

gres

s1st 2nd 3rd 4th

SHORT-TERM DIFFERENCES, LONG-TERM NEUTRAL

Past performance does not indicate future performance and there is a possibility of a loss.


AVERAGES DON’T TELL THE FULL STORY: ELECTION CYCLE RETURNS ARE NOT PREDICTABLE

Chart Source: Columbia Management Investment Advisers, LLC.


Breakdown of Major Components of GDP as a Percentage of Total Spending In the United States Since 1957

CHECKS AND BALANCES WORK; POLICIES EVOLVE SLOWLY, MARKETS ADAPT

Sources: FRED, Global Financial Data, 6/30/20. Index definitions can be found on page 20. Past performance does not guarantee future results and there is a possibility of loss. Scale is logarithmic.

0%20%40%60%80%

100%Government Expenditures Business Investment Consumption

1965Great Society

(Medicare, Medicaid)

1981Economic Recovery

Tax Act

1996Personal Responsibility

and Work Opportunity Act

2010Affordable Care Act

10

100

1,000

10,000

100,000

2010Affordable Care Act

1996Personal Responsibility

and Work Opportunity Act

1981Economic Recovery

Tax Act1965

Great Society(Medicare, Medicaid)

Despite several major spending

programs, the S&P 500 Index returned 10.07% annualized

from 1957-6/30/2020.


Investors often worry that a progressive candidate will radically re-engineer the economy. Despite concerns about major government policy changes, business investment and government spending have been remarkably consistent as a percent of GDP.


MARKETS DON’T TAKE POLITICAL SIDES

Source: Bloomberg, L.P., 6/30/20. See index definitions on page 20. An investment cannot be made in an index. Past performance does not guarantee future results and there is a possibility of loss.

Gallup Poll Presidential Approval Ratings and the S&P 500 Index Growth of $100,000

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

0102030405060708090

100

Gal

lup

appr

oval

pol

l num

bers

Grow

th of $100,000

Log Scale

%

1961 1963 1969 1974 1977 1981 1989 1993 2001 2009 2017

Presidential Approval Rating Gain/Annum % of Time>65 5.4% 13.9%50-65 4.2% 36.2%35-50 15.3% 36.8%<35 -19.7% 6.6%


Some of the best returns in the market came when the presidential approval rating was in the low range of between 36 percent and 50 percent.


-35

-25

-15

-5

5

15

25

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Tax cuts Signed(12/22/17)

Democrats win majority in House of Representatives

(11/21/18)Year

ove

r Yea

r Pe

rcen

tage

Cha

nge

SIGNATURE LEGISLATION IS INFREQUENT AND ITS IMPACT OFTEN UNEXPECTED

Sources: Bloomberg, L.P., FRED, 3/31/20. Most recent data available. Index definitions can be found on page 20. Past performance does not guarantee future results and there is a possibility of loss.

3800039000400004100042000430004400045000460004700048000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

ACA Signed

(03/23/10)

GOP wins majority in House of

Representatives(11/02/10)

8.6M Jobs added by medium-sized firms from

3/2010 to 12/2019


Example 1: Patient Protection and Affordable Care ActEmployers with 50 or more full-time employees are considered “large businesses” and are therefore required to offer employee health coverage or pay a penalty.

Nonfarm private medium payroll employment (50–499)

Example 2: Tax Cuts and Jobs Act of 2017Section 179 allows taxpayers to deduct the cost of certain property (such as machinery and equipment purchased for use in trade or business) as an expense when the property is placed in service.

U.S. capital goods new orders (nondefense ex-aircraft & parts)


PREDICTIONS TEND TO BE WRONG

Sources: Bloomberg L.P., Russell, 6/30/20. Index definitions can be found on page 12. Past performance does not guarantee future results and there is a possibility of loss .

Nominal U.S. 10-Year Yield

223.31%

176.57%

0%

50%

100%

150%

200%

250%

Cumulative Return

Russell 1000 Growth Russell 1000 Value

Cum

ulat

ive

Perfo

rman

ce %

2008-2016 2016-6/2020

92.08%

10.43%

0%

20%

40%

60%

80%

100%

Cumulative Return

0

1

2

3

4

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Yield

Average 10-Year Yield:2.45% (2008-2016)

Average 10-Year yield:2.25% (2016-6/2020)

Yiel

d%



THE HISTORICAL NARRATIVE IS NOT ALWAYS AS YOU REMEMBER IT

Sources: Bureau of Economic Analysis, Bureau of Labor Statistics and Haver Analytics, 3/31/20. Note: Long-term trends are all averages since the end of World War II in 1945 except for Median Weekly Earnings, which is an average of the change since 1971, when data collection began on that statistic. Capital expenditures are not yet available for 6/30/20.

President Jimmy Carter and Jobs President Reagan and Income GainsNonfarm payrolls Median weekly earning growth

President Barack Obama and Inflation President Trump and Business InvestmentCPI trend vs. actual Capital expenditures

152,000154,000156,000158,000160,000162,000164,000166,000168,000170,000

1976 1977 1978 1979

Actual Job Gains Post-WWII Trend

Tota

l em

ploy

ed (t

hous

ands

)

95

100

105

110

115

120

1980

1981

1981

1981

1982

1982

1982

1983

1983

1983

1984

1984

1984

1985

1985

1985

1986

1986

1986

1987

1987

1987

1988

1988

1988

Median Weekly Earnings Post-1971 Trend

Inde

xed

to 1

00

100105110115120125130135140

2008 2009 2010 2011 2012 2013 2014 2015 2016

Actual CPI Post-WWII Trend

Inde

xed

to 1

2/31

/08

= 10

0

100102104106108110112114116118120

2016

2017

2018

Actual Post-WWII Trend

Inde

xed

to 1

2/31

/16

= 10

0



RETURNS DURING AND AFTER ELECTION YEARS

-60% -40% -20% 0% 20% 40% 60% 80%

1928: Hoover vs. Smith1932: Roosevelt vs. Hoover1936: Roosevelt vs. Landon1940: Roosevelt vs. Willkie1944: Roosevelt vs. Dewey

1948: Truman vs. Dewey1952: Eisenhower vs. Stevenson1956: Eisenhower vs. Stevenson

1960: Kennedy vs. Nixon1964: Johnson vs. Goldwater

1968: Nixon vs. Humphrey1972: Nixon vs. McGovern

1976: Carter vs. Ford1980: Reagan vs. Carter

1984: Reagan vs. Mondale1988: Bush vs. Dukakis1992: Clinton vs. Bush1996: Clinton vs. Dole

2000: Bush vs. Gore2004: Bush vs. Kerry

2008: Obama vs. McCain2012: Obama vs. Romney

2016: Trump vs. Clinton

Average Return Year Subsequent to Election = 9.9% Average Return During Election Year = 11.3%

S&P 500 Index: 1928–2017

Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results and there is a possibility of loss. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. Source: S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Chart Source: Dimensional Fund Advisors


ANNUALIZED RETURNS DURING PRESIDENTIAL TERMS

-60% -40% -20% 0% 20% 40% 60% 80%

1929–1932: Hoover1933–1936: Roosevelt1937–1940: Roosevelt1941–1944: Roosevelt1945–1948: Roosevelt

1949–1952: Truman1953–1956: Eisenhower1957–1960:Eisenhower

1961–1964: Kennedy1965–1968: Johnson

1969–1972: Nixon1973–1976: Nixon1977–1980: Carter

1981–1984: Reagan1985–1988: Reagan

1989–1992: Bush1993–1996: Clinton1997–2000: Clinton

2001–2004: Bush2005–2008: Bush

2009–2012: Obama2013–2016: Obama2017–2019: Trump

Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results and there is a possibility of loss. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Average Return for Presidential Terms = 10.3%S&P 500 Index: 1929–2019



PRESIDENTIAL ELECTIONS AND S&P 500 RETURNSHistogram of Monthly Returns: January 1926–December 2019




MIDTERM ELECTIONS AND S&P 500 INDEX RETURNSHistogram of Monthly Returns: January 1926–December 2019

Past performance is not a guarantee of future results and there is a possibility of loss. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.Chart Source: Dimensional Fund Advisors


HYPOTHETICAL GROWTH OF $1 INVESTED IN THE S&P 500 INDEX AND PARTY CONTROL OF CONGRESS

January 1926–December 2019


$0

$1

$10

$100

$1,000

$10,000

1926 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1989 1994 1999 2004 2009 2014 2019

Republican Democratic Mixed



INDEX DEFINITIONS

The Consumer Price Index (CPI) program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.

The Dow Jones Industrial Average is a price-weighted index of the 30 largest, most widely held stocks traded on the New York Stock Exchange.

The S&P 500 Index is a market-capitalization-weighted index of the 500 largest domestic U.S. stocks.

The Russell 1000 Value is an unmanaged index considered representative of large-cap value stocks. The Russell 1000 Value Index is a trademark/service mark of the Frank Russell Co. Russell® is a trademark of the Frank Russell Co.

The Russell 1000 Growth is an unmanaged index considered representative of large-cap growth stocks. The Russell 1000 Growth Index is a trademark/service mark of the Frank Russell Co. Russell® is a trademark of the Frank Russell Co.

The Misery Index is an economic indicator calculated by adding the current unemployment rate and the inflation rate.

Indexes are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results.


DISCLOSURESHightower Texas is a group of investment professionals registered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment, tax, or legal advice. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Hightower or any of its affiliates shall not in any way be liable for claims and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice. Forecasts represent median expectations and actual returns, volatilities and correlations will differ from forecasts.

These materials were authored by DiMeoSchneider & Associates, LLC and are being used with their permission. This document was created for informational purposes only; the opinions expressed are solely those of the author and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

PERSPECTIVES ON ELECTIONS AND U.S. EQUITY RETURNS 09... · 2020. 9. 16. · PRESIDENTIAL ELECTIONS...

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