President Trump warned on Monday that the market, including stocks, your 401(k) and the “record high Nasdaq,” would come “crashing down” if he loses.
On the other hand, you’ll be shocked to learn that the New York Times thinks a Biden win “could be bullish for stocks.”
Wall Street banks, including Bank of America, J.P. Morgan, SG Securities, and others, are pumping out detailed analyses of what various outcomes could mean.
Who is right? And why?
Here’s what you need to know: Of all the reasons to vote for Donald Trump or Joe Biden for president this November, one of the worst is what you think their election will mean for your stock portfolio and your 401(k).
That’s not because such considerations are selfish or greedy. Nor because you could easily avoid any negative outcomes anyway by changing your investments.
It’s because nobody knows what either candidate will mean for the stock market, and everyone who says they know is talking out of their hat.
A Wall Street source reminded me Monday night that in the fall of 2008 the Street was so alarmed by the prospect of Barack Obama becoming president that for a period of time there was about an 80% correlation between the polls and the S&P 500: Every time Republican John McCain got a bump in the polls, stocks went up.
Yet Obama was elected. And the Dow Jones Industrial Average, which closed at 9,625 on election day, collapsed over the next eight years all the way to…er…18,332. Oops.
The market also boomed under Democrat Bill Clinton, and tanked under Republican George W. Bush.
But anyone who therefore concludes that Democrats are better for stocks than Republicans is talking nonsense. This is pure “data mining,” also known as cherry picking—or trying to extrapolate universal truths from a few data points.
“Two key events appear to be responsible for much of the differential returns under Democratic and Republican presidents,” reported analysts at Research Affiliates in a 2017 paper. “Specifically, a Republican was president during the two great financial and economic crashes that began in 1929 and in 2008, respectively; unsurprisingly, a Democrat held the office of president during the immense subsequent recoveries. This appears to explain a majority of the return difference. Had the order of incumbencies been reversed, the effect would be reversed, suggesting the finding may be serendipitous.”
I’ve been looking through stock market returns under various presidents going back to the 1920s, using data courtesy of New York University’s Stern School of Business.
The market did great under Eisenhower, a Republican. It also did great under Ronald Reagan, another Republican. Oh, and although this is often forgotten, the market did well under Republican George H.W. Bush too. It was spectacular in Franklin Roosevelt’s first term, and terrible in his second. Meanwhile it was really poor during Harry Truman’s first four years, but terrific in his second.
It was lousy under Nixon/Ford, Republicans, and lousy under Jimmy Carter, Democrat.
You can play this game all day.
People are now so deranged on the subject of politics that it is impossible to have a rational conversation on the topic. The same people who insisted four years ago that the stock market boom was a “big, fat, ugly bubble” under Obama promptly insisted that the continued boom under Trump was somehow more real. There again, the Democrats who had hailed the stock market boom under Obama promptly dismissed the one under Trump. I have no doubt that if you direct your eyes to the comments section below you will see conservatives denouncing this article as liberal propaganda and liberals denouncing it as conservative propaganda.
Beware of letting politics drive your retirement portfolio.
Yes, there are plenty of Wall Street banks telling us what a Biden or Trump victory would mean, but they don’t know either. They are mostly suffering from that terrible professional disease, Need-To-Say-Something-Itis. The U.S. constitution is designed to prevent too many radical policy moves. Wait until either candidate tries getting their big campaign agenda into law. (We are still waiting for that “wall.”)
I was worried in 2016 about what Donald Trump would mean for the market. Turns out I needn’t have been. On the other hand I thought he’d be terrific for gold. He has been—but it took until 2019, more than two years into his presidency, before precious metals really got going.
Often elections end up meaning the exact opposite of what you might expect. Conventional wisdom said Trump and his wall would be terrible for the Mexican peso. It collapsed immediately he won the election. But by the summer of his first year in office the peso was higher against the dollar than before the election.
Since Trump pulled out of the Paris climate agreement in 2017, the FactSet index of alternative energy stocks has jumped 80%. Oil and gas producers? They’re down 60%.
And of the 128 industries tracked on the stock market by FactSet, what’s been absolutely the worst performer under Trump?
No, really. It’s not even close. The sector is down about 80% since his election. So much for hopes he would rescue the industry.
Meanwhile tech stocks, based in progressive Silicon Valley, have boomed. (Oh, and New York Times stock is up 250%).
Trump’s biggest gift to the market has almost certainly been the $3.5 trillion in total budget deficits run during his (first) term.
The S&P 500 index of big company stocks has risen more than 50% since he was elected in November 2016. On the other hand the Russell 2000 RUT, +0.69% index of small-company stocks is up less than half that. And most of its gains were over before he even took office. The Russell peaked in 2018.
You can’t even extrapolate from the economy to the market. Do you think Trump or Biden will be better for economic growth? It may not mean anything for your portfolio. As professor Jay Ritter at the University of Florida has pointed out, high economic growth doesn’t mean high stock market returns, or vice versa.
But valuations matter. George W. Bush took office at the tail end of the crazy, late 1990s bubble. Stocks were going down, no matter what he did. Meanwhile Franklin Roosevelt and Obama took office just after stock prices had collapsed: So prices had plenty of room to rebound. Today, U.S. stock prices overall are pretty high by any historic measure. That may matter more for the next four years than whoever wins.
Yet there is one way the elections can help your portfolio. Conventional wisdom can sometimes create buying opportunities simply by overreacting before the news. That’s what happened before the elections of FDR and Obama, when worries about a left wing president sent prices tumbling. So if the election creates a panic or a stampede in one direction or another, look for opportunities.
Don’t be afraid to go against the crowd — especially when the crowd thinks it knows what it’s talking about, but doesn’t.