Whether Trump or Biden Wins, the Election Won’t Matter For the Market

For starters, there are numerous factors and trends that matter more to the direction of the stock market than whether Donald Trump or Joe Biden secures a second term as president and which party controls Congress. On the list are the outlooks for U.S. and global economic growth and inflation, the timing and magnitude of Federal Reserve interest-rate cuts, the implications of the artificial intelligence boom on corporate earnings, and wars and other conflicts abroad—to name a few.

The election isn’t front of mind for most professional investors, anyway. Respondents to BofA Securities’ February Global Fund Manager Survey listed it as the fifth-greatest risk to markets this year, well behind higher inflation, an economic hard landing, and other factors.

Historically, stock returns in presidential election years haven’t been that different from the average year. Since the end of World War II, the
S&P 500
has gained an average of 6.8% during presidential election years, according to data from Bespoke Investment Group. That’s about a percentage point less than the index’s long-term annual average return. Then, contrary to the conventional wisdom that Republicans tend to be more business friendly, the S&P 500 has actually averaged a higher return under Democratic administrations over its history. Differences in Congressional control have no significant impact historically either.

Market moves during election years do tend to follow a similar pattern—declines leading up to early November, then a surge through year end once the winner is revealed. “There is typically seasonality around the election, where markets are subdued ahead of elections (de-risking due to event uncertainty) followed by a rally once the uncertainty is removed,” wrote Marko Kolanovic,
J.P. Morgan’s
chief market strategist. 

But what’s happening in the world and the economy can far outweigh the presidential contest. Take 2008, when Democrat Barack Obama defeated Republican candidate John McCain. The S&P 500 dropped 37% that year—one of its worst ever—as the financial system seized up.

Control of the presidency and Congress can determine fiscal spending priorities. But with the U.S. federal government already running a spectacularly large budget deficit, a major postelection round of stimulus spending is unlikely no matter the winner. On the monetary-policy front, Federal Reserve Chairman Jerome Powell has repeatedly emphasized that the central bank’s decisions aren’t affected by politics.

“Even if monetary policymakers wanted to help one party over the other, which we do not believe is the case, it is not entirely clear which way they should lean,” wrote
Wells Fargo
senior economist Michael Pugliese. “The delicate balancing act between reducing inflation—a prominent issue for voters this year—without causing untoward damage to the jobs market—a perennial issue for voters—remains.”

There are potential implications for monetary policy from some of Trump’s stated policy goals, most of all protectionist tariffs including a universal 10% levy on all imports. If implemented, those could cause inflation to reaccelerate in 2025 or beyond, forcing the Fed to consider raising interest rates again, says Jake Schurmeier, a portfolio manager at Harbor Capital Advisors. That could push up bond yields and weigh on the stock market, but it’s simply too early to make a call today.

Later in his term, Trump also presented some unconventional nominees for Fed positions, including former Republican presidential candidate Herman Cain and gold-standard proponent Judy Shelton. Neither made it through the Senate confirmation process. The implications for the Fed under a second Biden term are more of the status quo.

Even on an industry or sector level, control of U.S. government hasn’t been predictive of returns. Just look at performance during the current administration.

Since election day in 2020, oil-and-gas stocks in the S&P 500 have returned 233% including dividends, versus a nearly 30% decline by the Nasdaq Green Energy Index. Even if you felt strongly in November 2020 that the Biden administration would be friendlier to the renewable-energy industry than to fossil fuel producers, the market didn’t cooperate.

Ditto for pharmaceutical stocks, where the boost from excitement about weight-loss drugs more than offset concerns about Medicare drug-price negotiation unveiled by the Biden administration. The group has outperformed the broader market.

Before the 2020 election, Wells Fargo Securities’ head of equity strategy Chris Harvey designed two baskets of stocks that followed the conventional wisdom of which industries and companies would benefit most from a given candidate’s presidential victory: A “red,” or Trump, portfolio and a “blue,” or Biden, portfolio. Through mid February, the blue portfolio had returned 45%, versus a 55% return by the S&P 500. The red portfolio boasted a return of 86%, despite Trump’s 2020 election loss.

“I think you can tie yourself up in a knot thinking about who will win—and who will benefit and who won’t,” says Kimball Brooker, co-head of the global value team at First Eagle Investment Management. “Our preference is to focus on basic fundamental items like a company’s competitive position, financial health, and the quality of its management team. Hopefully, the result is businesses that will be okay regardless of what happens politically.”

The best companies that often make the best investments are those with high-quality businesses exposed to durable growth trends that can control their own fate—not those that depend on government support or the removal of regulations. Don’t forget to exercise your right to vote this November, but remember not to let it affect your portfolio.

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com