Elections: Perception Versus Reality

It’s shaping up to be a presidential election season like no other. It feels like we say this every four years, but this year it certainly feels very different. Whether it be the hardships inflicted by Covid, the increasingly polarizing political platforms, or the growing influence and reverberation from mainstream and social media inundating us with images and opinion, this election seems like nothing else. Naturally, our clients have questions. What would a Democratic wave do for markets? Would a contested election cause markets to collapse? What industries benefit or get hurt under different administrations and how should we position ourselves in advance? With the election now less than two weeks away, we felt it was appropriate to take a break from our normal commentary in order to speak specifically to the election and what we think it means for investors.

 

Anyone having read our commentaries understands that a lot of what we try to do in our analyses is to look through the daily noise in order to see the bigger picture. It isn’t that the noise isn’t important. It is that the noise is temporary and constantly changing such that, when contrasted against an economy that is remarkably stable (potential shocks to an economy such as Covid noted), it can distract from the true reality and thereby influence one’s investing behavior in negative ways. Political rhetoric is noise, and while rhetoric may have threads back to specific policy implications, the legislative process itself typically dulls what is ultimately passed. Rhetoric is what elections run on, however. It is what gets voters to the polls, but that same emotion and motivation should not derail a disciplined investing plan.  Every election is cast as a do or die moment, and make no mistake about it, many have been just as contentious as the one that lies ahead of us on November 3^rd. Markets have endured contested elections, social unrest, mandates for wealth redistribution, racial protests, claims of voter fraud and disease — mirroring contemporary concerns. Objectively, this election is not unique in its place in history. While we will briefly touch on the implications for each candidates’ platform, the focus in this piece is really to illustrate what impact political control has had on market returns historically. We’ve done so understanding that while the specific legislative priorities for the Democratic and Republican parties may have shifted over time, they’ve directionally remained consistent, with one generally advocating for greater government involvement in the economy and the other supporting a more laissez-faire approach.

 

To test how political control may influence market returns, we examined the past eighteen presidential elections to determine whether or not a president of a particular party tended to be associated with either positive or negative returns for the market. We examined modern, post-war elections from 1948 to 2016 (Truman to Trump) and what we found was that in ten of the 18 instances, irrespective of which party was elected, the very next calendar year return (“post-election year”) was positive by an average of 19.93%. Conversely, eight of the 18 post-election years posted losses which averaged -7.42%. Things start to get more interesting, however, when we began to break this down by party. The average post-election year return following a Democratic President has averaged 15.26%, while it has averaged just 1.79% following the election of a Republican President. At this most basic level, post-election years – particularly years in which Democrats get elected to the presidency – tend to be associated with higher than average returns. This is somewhat counterintuitive, but it begins to make more sense once you expand the analysis to include not only a party’s control over the presidency, but also consider which party has control of the House and the Senate. The chart below helps summarize these various control scenarios.

 

 

 

The first full moon of October occurred on October 1 and it was the Harvest Moon. The second full moon on October 31 will be the Hunter’s Moon. The names of full moons date back to early Native Americans and Colonial folklore. They were used to mark the seasons and describe activities or events typically occurring at the time. For example, the full Wolf Moon in January coincides with the howling of wolves that was often heard at that time of year. The full Snow Moon in February coincides with a time of heavy snowfall. There was some variation in the full moon names, but in general, the same ones were consistent among regional tribes and adopted by European settlers who applied them to their own calendar.

 

Whenever two full moons appear in a single month, the second full moon is called a Blue Moon. Hence, we describe any infrequent but not rare events as happening “Once in a Blue Moon.” This year, we will see the first Halloween full moon since 2001. A Halloween full moon only occurs roughly once every 19 years. According to astronomers, the next Halloween full moon (after 2020) will be in 2039, 2058, 2077, and 2096. Adding to the unusual year we are having, 2020 is also the first time a Halloween full moon will appear for all time zones since 1944. The 2001 Halloween full moon only appeared for the Central and Pacific time zones.  

 

A Blue Moon every 2.7 years, combined with a full moon landing on Halloween which only happens every 19 years and that will occur in every time zone for the first time in three-quarters of a century is a rare trick for 2020. Well played, Mother Nature, well played.