There is magic in the air. With so many vying to challenge President Donald Trump in 2020, and more coming, who finally wins?
You – if you follow this simple stock market advice.
Stocks will benefit from big but little known political impacts. The S&P 500 rose in 91% of the third years of all presidents’ terms – ever since the index's 1925 inception – averaging 18% per year, way above average. There hasn’t been a negative third year since World War II began in 1939.
Year four was also positive 83% of the time going back to 1925 – averaging 11%. Both years rose much more consistently than years one and two. Coincidence? No.
Why does this work? The magic of gridlock! Almost all big, scary legislation in modern American history happens in presidents’ first two years – as Washington front-loads big, often contentious, confrontational legislation. The result? Many can benefit. Others suffer. So uncertainty spikes, which causes volatility. In those years, stock returns are hugely variable. Then midterms render relative gridlock, quieting Congress in the president’s third and fourth years. The election process itself dampens fourth-year legislation.
Big, heavy legislation is usually like some obstacle course for business and people – one with heavy, hard, fast-swinging, painful obstacles. It’s scary. Gridlock creates a course with stationary obstacles. It’s easier. So we get more optimistic.
While years three and four shine, their paths differ. In year three, stocks typically rise strongly through mid-summer, then wiggle sideways as the campaign heightens, hyping uncertainty. We’re in that early-year sweet stretch now. Those people claiming that stocks will sag after a great first quarter are arguing against nine decades of history.
Fourth years start sideways amid growing election uncertainty. But clarity comes. Primary elections shrink the field – and uncertainty. By summer, we have two known finalists. We finally get a winner – always. Uncertainty falls – boosting the back half of the fourth year.
These are just averages, of course. But the repeating pattern is basic. Election years have been negative just four times going back to 1925. Could 2020 be another? Perhaps. I don’t see the factors to cause that. Instead, I see false fears and unloved good news.
So, to win, enjoy stocks calmly through the campaign circus. That circus blares louder later as campaigning intensifies, fraying uncertainty late this year and in early 2020. That is normal.
Who is president in 2021? I haven’t a clue. It isn’t important now. Polls won’t help anytime soon. Even after 2018’s midterms shifted some statehouses back to Democratic control, Republicans control most state governments bottom-up. If America votes bottom-up, like in 2016, President Trump will win again.
How? As I wrote loudly in mid-2016, Trump would win if he lost the popular vote by 3%. It’s still true – for the same reasons. The Electoral College has a 4% Republican lean. But, as I said then, even had Hillary Clinton won, stocks would have risen because of falling uncertainty. To Trump’s benefit, I should remind you that since World War I, we have only voted out three incumbents: Herbert Hoover, Jimmy Carter and George H.W. Bush. To his potential detriment, Trump is very unusual.
For investing, however, it’s way too early to sweat the campaign stuff. Only when the Democratic field narrows will stocks start pricing in final outcomes. Speculating now on November 2020’s president-elect is premature. Stocks likely follow normal paths: strong now through summer, then a sideways wiggly for a while – until the field finally narrows– then rising again.
So celebrate 2019’s legislative inactivity. And 2020’s eventual falling uncertainty. Own stocks.
With this coming presidential election, who do I want to win? You.
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