The Market Doesn’t Care Who is in White House
Cheers to those who refuse to be distracted!
If you paid attention to the financial press in the fall, you might think the market would be facing an existential crisis of epic proportion now that Joe Biden is in the White House. Even the outgoing President postulated that the market would struggle if he weren’t re-elected.
All of it is complete and utter nonsense. The market does not care who is in power, and there is no empirical evidence to suggest otherwise.
Talk of this or that sort of politics having a meaningful impact on the markets is just that: talk. Market valuations are ultimately based on the long-term performance of the economy and, with it, the underlying results of companies trading on the exchanges.
In the short term, there are certain things that the market will indeed react to. For example, the talk of stimulus and payments to citizens gets the market excited in a positive way.
Stimulus checks are thought to help support the economy. Money received is money spent, which helps business. That simple formula, again in the short term, fits a nice and neat narrative of market bulls.
But here’s where the words of noted value investor Benjamin Graham ring true: “In the short run, the market is a voting machine, but in the long run it is a weighing machine.”
That means it is the long-term effect of policies that ultimately matters. Long-term fundamental impacts, not smoke and mirror financial gimmickry, are what will be important. So, if the policies pursued do not generate meaningful results, the markets will eventually reflect their failure.
This whole idea that ‘the party in charge matters to markets’ has other narratives. Conservatives are good for stocks, is a common theme. It’s tied to the idea that lower taxes and regulations translate to fatter profits.
The corollary is that liberals are bad for stocks - higher taxes and more regulations hurt business.
In truth, those narratives are too simplistic. There are far more factors influencing the markets than merely the party in charge. The data does not support the thesis.
Since Harry S. Truman, there is no rhyme or reason for the market’s performance and the party in charge. According to a Forbes analysis, the S&P 500 gained the most under two Democrat administrations, Barack Obama and William Clinton. After those two, we find Republicans Eisenhower and Reagan.
Despite all his boasting, the market fared only middling under Donald Trump. At the bottom of the list were Republicans Bush 2 and Richard Nixon. The fairy tale Camelot administration of John F. Kennedy was third from the bottom in terms of market performance.
There are all sorts of factors driving the market performance during a presidency. Given most factors' long-term nature, the market’s performance is more often set by policies pre-dating the current President.
That was the case for Obama and Bush 2. Obama took office after the market crashed during the housing collapse. Bush 2 took office shortly before the dot.com bubble burst.
What is interesting is none of the outcomes can be singularly credited or blamed on a specific policy.
To be clear, some policies are better than others, but for the most part, politics does not dictate the market’s failure or success.
So we have to be careful not to assume that Biden’s more progressive and less pro-business agenda will mean lousy stock performance.
That said, mistakes can be made, in my opinion. One of the biggest comes in the area of taxes.
Record highs in the market under Trump can arguably be pinpointed to his effort to cut and streamline corporate taxes. It would stand to reason that elimination of those corporate tax cuts would have the opposite effect.
Ultimately we believe that competitive U.S. corporate tax rates benefit our economy. Sustaining good growth in the economy should be the goal of all policy-makers. Unfortunately, other narratives often get in the way.
We won’t be distracted by simplistic narratives as we assess the new administration.
If you would like to discuss how the new administration may impact your plans, please don’t hesitate to contact us.