As I contemplated a topic for this quarter’s newsletter I thought back to what I’ve been asked most frequently during client meetings this year. The election topic itself wins by a landslide. I don’t believe I finish a meeting without being asked, “What impact will the election have on the stock market?” Considering the current political circus I am likely stepping on the third rail with both feet by writing this piece. However, I thought it was important to address a few common myths about the election and what I believe should really matter moving forward.
Myth #1: Party affiliation drives stock market returns
There is very little evidence to support the fact that either party winning the White House has a measurable market impact. Since 1900, when a Republican has been elected the average annualized return for the Dow Jones Industrial Average has been approximately 3%, while Democrats in office average 7%. When you factor in volatility surrounding those returns, statistically they are the same. Essentially, stock market returns have been consistent regardless of which party controls the White House.
Myth #2: Gridlock is good for markets
This theory suggests that having a divided government creates gridlock, nothing gets done and yet the markets move higher. Again, looking back over a century of data, there is very little support that a divided government is better. Actually, markets have done better when one party controls both the White House and Congress.
What does matter?
Forces that move the market are fiscal policy, certainty and the economic cycle.
Globally central banks have pushed monetary policy to its absolute limit and have arguably reached the point of diminishing returns. Negative yields no longer move the needle. What must come next is sensible fiscal policy to include infrastructure spending, tax reform and more efficient regulation. Addressing these items could drive GDP growth above the sluggish 1% to 2%.
One thing I can say for sure over my 20 year career is markets do not like uncertainly. I would attribute much of the recent market volatility to uncertainty surrounding the election, tax policy, healthcare, interest rate policy, etc. Markets and businesses will accept and adjust to most any set of rules they are given. However, when there is uncertainty, businesses put capital spending and hiring on hold and there is a general lack of growth in the economy.
Economic and debt cycles tend to be very consistent and believe it or not we are in one of the longest expansions in history. This is likely attributable to slower growth, which has allowed this economic cycle to extend above the normal average of five years. You cannot avoid economic cycles and we will likely have another recession in the next few years. However, it will likely be a mild recession because over-all growth has been so low and there are very few obvious excesses in the market.
From the desk of Denis Curcio
This article was an excerpt from our Summer 2016 Quarterly Newsletter. To view the full newsletter click here.
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