US elections: Sometimes ‘sleepy’ is better for a stable economy - opinion
Investors are not only looking to discover who will be the next president, but also to see what happens in Congress.
By ERAN PELEGIN REALITY, the biggest influencing factor on market performance is not who occupies the White House, but rather where were we in the economic cycle.’(photo credit: REUTERS)
There are big differences, in terms of both personality and politics, between Trump and Biden. However, from an economic perspective, the differences between them are not so large.Both generally subscribe to the mainstream American economic worldview. This statement would not have held were it Bernie Sanders, who holds a social-democrat economic perspective that in the US is seen as a paradigm change, would have been standing as the Democratic presidential candidate.So, at least from an economic perspective, the identity of the winner of the presidential race should not have a too significant impact on the general direction of the US economy and financial markets in the medium to long term. This argument is supported by historical experience: the performance of the US stock market has been similar during terms of Democratic and Republican presidents.In reality, the biggest influencing factor on market performance is not who occupies the White House, but rather where were we in the economic cycle. For example, the performance of the stock market was weak during the term of George W. Bush – but he became president after the burst of the “dot.com bubble” in 2001 and ended his term during the 2008 financial crisis. If we observe the performance of the S&P 500 index from 1933 to 2019, it reflects an average annual return of 9.5% – and that the return was fairly similar between different combinations of Democratic/Republican President/Congress (except for the combination of Republican President and Democratic Congress in which returns were somewhat lower).By the way, while we are focusing on US political-economic history, it is worthwhile noting an interesting fact: historically it has been very rare that a president has been reelected during or right after an economic recession, like the one we are currently experiencing.And what about the short-term? Investors are not only looking to discover who will be the next president, but also to see what happens in Congress. Today, Republicans control the Senate while the Democrats dominate the House of Representatives (and are expected by all to continue to do so). Will the Senate move to Democratic control? For a medium-term economic view, the answer to this question is almost as important as that of the identity of the next president. Investors believe that a “Blue Wave” (Democratic win in both White House and Congress) will lead to more significant government (fiscal) support to the struggling economy, relative to a scenario in which Republicans retain control of the Senate. This is clearly a big focus for financial markets currently. A Blue Wave is more likely, for example, to push long-term interest rates (yield on long-term US Treasuries) higher.Finally, due to Biden’s large advantage in the polls, investors believe that it is most likely that he wins the elections – and therefore, financial markets already reflect this scenario, at least partially. Hence, a Trump win will (again) be a surprise to markets. However, this time around, I do not believe that markets will react positively as they did after Trump’s surprise win back in 2016 (although they will still perform much better than in a scenario of a contested election). In an era of great uncertainty – whether health, political or economic -- financial markets are longing for stability. Although Biden is not the ideal candidate or leader, sometimes ‘Sleepy’, but stable, is good.The writer is chief investment officer at Clarity Capital.
