By Michelle Connell, CFA | 8 min read
Once the winner is known, how will the markets perform for the rest of 2020 as well as 2021? What industries and stocks will have more opportunity for upside? And how will the Pandemic make it different this time versus history?
History typically provides a good indication of what will happen in the future for a similar event. The question for investors is whether they should look at past presidential elections to guide them with their investment decisions. My goal is to look at how markets have reacted during three different phases: pre -election; the remainder of the fourth quarter after the election; and the four years after the Presidential election.
According to Ned Davis Research, the markets have done a better job of predicting the Presidential winner than the polls. Since 1900, for the time period from the second Presidential convention to Election Day, the Dow Jones Industrial Average has gained a median of 5.7% when the incumbent party has won versus a negative 1.4% when the incumbent party has lost. (The 2016 stock market foresaw the loss of Clinton, the incumbent party, when the DJIA posted a negative 1.1% performance for this time period.). The fact that the DJIA has returned almost -7% from August 27th through October 26rd may be signaling a possible Trump loss. Either way, this indicator bears attention, and perhaps portfolios should be allocated accordingly.
The certainty of knowing the results of the Presidential election typically moves the stock market higher-regardless of the outcome! Between the election years of 1940 through 2016 the median return during the fourth quarter of an election year was a positive 3.5%. However, when the incumbent has been re-elected, (Democrat or Republican), the return has ranged from 8 to 10%. (Source: JPMorgan database.). Get ready for some of the $4.4 trillion in liquidity that is sitting on the sidelines to coming roaring back into the stock market right after the election in the hopes of participating in this upside.
History also gives us an indication of how the markets will perform annually for the four years after a President is elected when there was a Republican incumbent. For election years of 1900-2016, when a Republican incumbent President lost, the DJIA performed the best with average yearly returns of 15.1% for the first year after the election, – .3% for the second year, 30.1% for the third year, and -6.1% for the fourth year after the election/the year preceding the election. These four annual returns resulted in a compounded return of 36.4% for the four-year period and an annualized return of 9.7%. (For the thirty Presidential elections from 1900-2016, the Republican incumbent Presidential candidate lost six times.) (Ned Davis Research)
When a Republican incumbent President won, the DJIA performed with average yearly returns of 8.2% for the first year after the election, -1.3% for the second year, .1% for the third year and 19.8% for the fourth year after the election/the year preceding the election. These four annual returns resulted in a compounded return of 28.07% for the four-year period and an annualized return of 6.7%. (For the thirty Presidential elections from 1900-2016, the Republican incumbent Presidential candidate won ten times.) (Ned Davis Research). If these results are indicative of future investment performance for the next four years, a Biden win would be the best for 2021, while a Trump win would be best for 2023.
No doubt that when a “blue sweep” has occured, it led to higher fiscal stimulus that helped fuel the domestic economy and the investment markets. However, now such a “sweep” should consider the probability of higher taxes and lower corporate profitability and how they may impact future investment returns. The estimated “hit” to S&P 500 earnings for 2021 is between 4-13%. (Ned Davis Research)
Some investment styles and sectors will be impacted more than others by presidential election results. Typically, the year after an election, healthcare and communication services are the strongest performers regardless the Presidential winner. Names to look at include: Universal Health Services (UHS), Anthem (ANTM), and on pullbacks, Verizon (VZ) and T-Mobile US (TMUS). Value and small cap stocks can also do well the year after a Presidential election. However, the economy must be in an upswing for this to occur. Given the fact that value and small cap stocks have underperformed the market this year, these two areas are worth investigating. Two stock candidates include: Tabula Rasa HealthCare (TRHC) and Moison Coors Beverage (TAP).
Year to date, energy and financials have posted negative returns (-47% and 16% respectively). If Trump wins, it would be positive for both sectors. Potential stock candidates in these two sectors include: HR Block (HRB) and Exxon Mobil Corporation (XOM). If Biden wins, expect the renewable energy sector and companies that benefit from a higher minimum wage to profit. On pullbacks, stock candidates include Renewable Energy Group (REGI) and Target (TGT). Finally, as both candidates support infrastructure spending, this sector should continue its strong 2020 performance into 2021. Possible beneficiaries from infrastructure spending include Jacobs Engineering (J) and Summit Materials (SUM).
Obviously, an investor needs to not only consider how past markets have been impacted by Presidential election results, but also incorporate the economic uncertainty of the Pandemic in their analysis. While we do not know when vaccines and treatments for Covid-19 will be available, we do know that the investment markets are forward-looking. While consumption and demand in some industries may have be destroyed or push out indefinitely, other Industries’ demand will simply be delayed. Examples of industries with uncertain recoveries that should be avoided include hospitality and cruise lines. It’s going to be a very long recovery to profitability for companies such as Marriot International (MAR) and Carnival Corporation (CCL). Don’t dismiss industries with delayed consumer demand that have the ability to produce upside within the next twelve months. Examples include airline companies such as Alaska Air (ALK), as well as medical device companies that support elective surgeries such as Boston Scientific (BSX) and Acutus Medical (AFIB).