Talking about politics in mixed company might be a faux pas, but it currently feels unavoidable. Investors are clamoring to know the implications of the outcome of November’s Presidential election on the financial markets. History suggests that the outcome of the election doesn’t matter nearly as much for markets as most suspect that it does. At least that’s what my 44 years of life have taught me. With the exception of one, each of the Presidents of my lifetime—Gerald Ford, Jimmy Carter, Ronald Reagan, George H.W. Bush, Bill Clinton, Barack Obama, and Donald Trump—experienced not only positive annualized returns over their times in office, but also double-digit annualized returns over their terms.1 The notable exception was George W. Bush, whose term concluded during the height of the global financial crisis and weeks before the market recovery commenced.
Timing, as George W. Bush would likely consent, is often everything. Consider the terms of Presidents Reagan and Obama. Most Americans would be hard pressed to articulate many similarities between those two administrations. And yet, the two standard bearers of their parties experienced remarkably similar US equity market returns over their eight years in office. Under Reagan, the S&P 500 Index advanced 15.6% per year; under Obama, 15.8% per year.1 We could attribute it to their policies and legislative accomplishments but should at the very least acknowledge their timing.
What did Reagan and Obama really have in common?
- They both became Presidents in recessions.2
- At the time they first took their oaths of office, equities were historically cheap.3
- They both benefited from monetary policy actions designed to overcome a major ill that had inflicted the economy. In the case of Reagan, high and rising inflation. In the case of Obama, it was the leverage that had built up in the global financial system. In both instances, Fed action helped to restore the economy and the financial system to health.
- They were both the beneficiaries of favorable demographic trends. For Reagan, it was the 70 million Baby Boomers entering good earnings years. For Obama, it was the 80 million Millennials entering the work force.4
The President on January 20, 2021, be it Donald Trump or Joe Biden, will be taking the oath in what will likely be a nascent economic recovery from the deepest recession in US history. Equities, by then, will likely still be historically cheap to bonds.5 The Federal Reserve is taking unprecedented policy action to respond to unparalleled job losses. Millions of Americans are poised to enter their thirties over the next four to eight years.6 Does that all sound familiar? Starting points matter and the victor on November 3 will likely be well positioned to preside over business and market cycles that could just be getting started.
There’s no doubt I’ll spend the next weeks talking about politics in mixed company. The job demands it. I will pivot back, every chance I get, to the likely conditions at the starting point of the administration. In my opinion it is what matters most.
1 Source: Bloomberg, as represented by returns in the S&P 500 Index during each president’s time in office. Index returns are for illustrative purposes only and are not intended to represent the returns of any particular investment. It is not possible to invest directly in an index. Past performance does not guarantee future results.
2 Source: National Bureau of Economic Research
3 Source: Bloomberg, Standard & Poor’s, as represented by the price to trailing 12-month earnings ratio of the S&P 500 Index
4 Source: US Census Bureau
5 Source: Bloomberg. The comparison is the S&P 500 Index earnings yield minus the 10-year US Treasury rate.
6 Source: US Census Bureau, 6/30/20
Image sources: President Reagan: Staff / Library of Congress; President, Obama: Pete Souza / Library of Congress
The S&P 500 Index is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.
The trailing price-to-earnings (P/E) ratio is a relative valuation multiple that is based on the past 12 months of actual earnings. It is calculated by taking a company’s current stock price and dividing it by the trailing earnings per share (EPS) for the past 12 months. For an index, it is the average trailing P/E ratio of the companies in the index.
The opinions referenced above are those of the authors as of September 1, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions.
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