2020 Election And Markets: What Policies To Keep An Eye On
Summary
- 2020 could be a decisive year for financial markets, with candidates on both sides of the aisle proposing vastly different policies and legislative agendas.
- Political parties don’t have nearly as much of an impact on the markets as they might take credit for.
- Policy changes could have the biggest impact on the markets.
This article was written by Michael Dzialo, president of Managed Assets Portfolio and portfolio manager of the Catalyst/MAP Global Equity Fund and the Catalyst/MAP Global Balanced Fund.
With American presidential elections looming, 2020 could be a decisive year for financial markets. Polarizing politics has candidates on both sides of the aisle proposing vastly different policies and legislative agendas. Each one could have a vastly different impact on the markets. As November 3rd approaches, some context around the key issues that could be most affected by the outcome of the election is helpful for anyone with exposure to financial markets.
Elected officials often take credit for booming markets, and distance themselves from lagging returns. But political parties don’t have nearly as much of an impact on the markets as they might take credit for. It is objectively difficult to tell what effect (if any) party control has on the stock market. This is demonstrated in the below table, which shows the breakdown of party control and returns of the S&P 500 for each Congress since 1945.
Congress (Years) | House | Senate | President | S&P 500 | ||
79th (1945–1947) | D | D | D | - | Roosevelt/Truman | 14.0% |
80th (1947–1949) | R | R | D | - | Truman | 0.0% |
81st (1949–1951) | D | D | D | - | Truman | 36.6% |
82nd (1951–1953) | D | D | D | - | Truman | 27.8% |
83rd (1953–1955) | R | Split | R | - | Eisenhower | 37.2% |
84th (1955–1957) | D | D | R | - | Eisenhower | 28.1% |
85th (1957–1959) | D | D | R | - | Eisenhower | 18.8% |
86th (1959–1961) | D | D | R | - | Eisenhower | 4.8% |
87th (1961–1963) | D | D | D | - | Kennedy | 11.4% |
88th (1963–1965) | D | D | D | - | Kennedy/Johnson | 30.9% |
89th (1965–1967) | D | D | D | - | Johnson | -2.3% |
90th (1967–1969) | D | D | D | - | Johnson | 25.5% |
91st (1969–1971) | D | D | R | - | Nixon | -9.8% |
92nd (1971–1973) | D | D | R | - | Nixon | 27.2% |
93rd (1973–1975) | D | D | R | - | Nixon/Ford | -41.1% |
94th (1975–1977) | D | D | R | - | Ford | 52.4% |
95th (1977–1979) | D | D | D | - | Carter | -6.6% |
96th (1979–1981) | D | D | D | - | Carter | 36.4% |
97th (1981–1983) | D | R | R | - | Reagan | 3.2% |
98th (1983–1985) | D | R | R | - | Reagan | 17.6% |
99th (1985–1987) | D | R | R | - | Reagan | 52.5% |
100th (1987–1989) | D | D | R | - | Reagan | 10.1% |
101st (1989–1991) | D | D | R | - | Bush | 17.5% |
102nd (1991–1993) | D | D | R | - | Bush | 33.4% |
103rd (1993–1995) | D | D | D | - | Clinton | 5.5% |
104th (1995–1997) | R | R | D | - | Clinton | 62.8% |
105th (1997–1999) | R | R | D | - | Clinton | 66.5% |
106th (1999–2001) | R | R | D | - | Clinton | 3.1% |
107th (2001–2003) | R | Split | R | - | W. Bush | -27.6% |
108th (2003–2005) | R | R | R | - | W. Bush | 29.4% |
109th (2005–2007) | R | R | R | - | W. Bush | 17.8% |
110th (2007–2009) | D | D | R | - | W. Bush | -34.5% |
111th (2009–2011) | D | D | D | - | Obama | 37.0% |
112th (2011–2013) | R | D | D | - | Obama | 15.1% |
113th (2013–2015) | R | D | D | - | Obama | 38.2% |
114th (2015–2017) | R | R | D | - | Obama | 10.8% |
115th (2017–2019) | R | R | R | - | Trump | 12.1% |
* Source: house.gov, senate.gov, Bloomberg | ||||||
The three occurrences of total Republican control do have the largest mean returns; however, the sample size is too small to draw conclusions. Furthermore, stock market performance under split administrations and Democratic control is solid, and an investor wouldn’t want to sit on the sidelines merely because they do not favor the party in control.Smart investors will not solely rely on partisan rhetoric pertaining to market booms or busts. Staying focused on the long term and avoiding giving into fear-mongering is the best course of action as the presidential election looms.
What does matter, and has long term implications, are the policies implemented by the executive and legislative branches. We identify the following as areas to watch in the coming months:
Policy proposal: Significantly higher minimum wage.
Opportunity: This may seem like a death knell for companies reliant on minimum and low-wage labor. Restaurants (especially fast food) and retail both employ low wage workers. However, these regulations may (in the long run) help larger enterprises with economies of scale, access to capital, and a willingness to invest in technology. Sammy’s Diner might not be able to afford an increase in labor expenses without hiking prices, but the mega franchise down the street can develop new ways to automate restaurant processes and decrease headcount, which has already begun to take shape at the mega chains. As such, they can now keep prices low and outcompete the local shops on price, widening their competitive advantage.
Policy proposal: A ban on fracking.
Opportunity: The fear of a swift transition from fossil fuels to “greener” energy sources has depressed valuation multiples for oil & gas companies. A ban on fracking could reduce the United States’ oil production and potentially create a catalyst for energy companies with minimal exposure to fracking plays to benefit from the lower supply of oil on the market. Combined with already-low valuations, this could be a boon for these companies’ stock prices. Governments around the world have announced plans to reduce fossil fuel usage, but in the meantime we are still reliant on these fuels to power our lives.
It will be up to money managers to allocate capital in a way that makes sense for the business environment.
Policy proposal: Infrastructure renewal.
Opportunity: Infrastructure renewal has bipartisan support – although the extent and direction of programs varies widely between candidates. Whether it is the progressive’s “Green New Deal” or the current administration’s $1 trillion plan, there could be opportunity to benefit from increased demand for construction work and associated materials and equipment. While we won’t have a clear picture of the details of a plan until after November, it is unlikely that the next five years go by without a significant infrastructure package.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.