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Retirees can rest easy – economics, not politics, influences markets
It was former US Democrat President Bill Clinton election strategist Jim Carville who famously quipped “it’s the economy, stupid” – a key message in the Arkansas Governor’s successful 1992 presidential tilt that saw the incumbent, Republican George H.W. Bush, tipped out of office after one term.
It’s a phrase nervy self-funded retirees should well remember as the 2024 US presidential election, arguably one of the most bitter election campaigns in US history, heads towards a potentially cataclysmic polling day on November 5 – especially if former President Donald Trump loses.
The market uncertainty travelling in the wake of this toxic election campaign would only be magnified by such a result. But even then, history suggests markets adapt – and recover. In this charged political environment, investors must hold their nerve, even with deadlocked polls, inane economic policies from both candidates and traditional October-November market volatility.
“Notwithstanding the history-making twists so far in this election cycle, the reality is that once the dust settles and the election uncertainty fades, markets tend to perform well,” says Zenith investment consultant Calvin Richardson.
It’s not just an issue of markets rising quickly out the electoral drama. The elections themselves are heavily influenced by economic circumstance – exactly the point Carville was making.
Research by Atchison Consultants’ principal Kev Toohey (pictured) bears this out by highlighting the intimate relationship between the economy and voting patterns, noting 1948 was the only election where the economy was in a recession and the incumbent (Harry S. Truman) won, and in over 70 per cent of elections where the incumbent party has lost, the economy was either in recession or heading in that direction.
Toohey’s research, based on the 24 elections since 1924, also uncovered that election years have marginally lower returns than non-presidential election years, with the markets likely to enjoy a stronger performance in the six months before November than the succeeding six months.
But these different performances still bear out his thesis that these elections have a benign impact on markets.
As Toohey says, “there’s not a statistically meaningful change in the level of market volatility leading into or out of an election.”
What it all suggests is that geopolitical events influence markets – but not long term. It’s interesting to note, for example, that the bellwether US index, the S&P 500, rose continuously from May 1942 to February 1946 during a global conflagration.
So, what investors need to do is examine the respective economic policies (or lack thereof) to determine how the winning candidate will impact on the world’s largest economy and the ripple effect that will have globally.
Richardson notes that despite a multitude of areas where the Republicans and Democrats offer stark policy differences, both are offering highly stimulative fiscal agendas that pose upside risks to inflation and bond yields – surely a factor in the Reserve Bank’s decision to adopt a cautious approach to loosening monetary policy. He also dissects four key policy areas where the differences could have economic consequences.
Domestic policy: Vice President Kamala Harris is offering big spending initiatives aimed at infrastructure, education and health, which should be positive for growth. Trump is similarly focused on job creation and economic growth – albeit with a concerted emphasis on deregulation. Vowing to “drill, baby, drill”, his policies would likely assist in lowering energy prices and inflation.
Taxes: Unsurprisingly, Harris won’t be renewing Trump’s signature corporate tax cuts enacted when he was in office. This would raise the corporate tax rate from 21 per cent to 28 per cent, increasing business costs and potentially hurting equity returns. Trump’s avowed aim to reduce the corporate tax rate to 15 per cent would boost earnings for US stocks and provide further tailwinds for the market’s outperformance.
Tariffs: The Biden/Harris administration has attempted to defuse a political line of attack and retained most of Trump’s tariffs. Trump has subsequently sought to outflank Harris and announced a sweeping increase in proposed tariffs. This could lead to higher prices for imported goods, potentially stoking inflation.
Immigration: Trump’s hot-button signature issue. If he wins, immigration is likely to be significantly curtailed, leading to a tighter labour market and putting upward pressure on wage inflation – a negative for equities and bonds.
In the heat of an election campaign – especially a campaign as bitter as this one – it’s easy to get caught up in the hype and ignore the long-term economic trends and how the policies of each candidate will impact on them.
Remember, that when Trump took office in January 2017, there was speculation about a market crash. It didn’t happen. And the current volatility is more attributable to economic fears about the recent disappointing jobs market report and whether the Federal Reserve (Fed) delayed interest rate cuts too long.
US Bank Wealth Management senior investment strategy director Rob Haworth puts it succinctly.
“The market today is more focused on corporate earnings and the potential for Fed interest rate cuts,” adding that the historical data shows that market returns are typically more dependent on economic and inflation trends rather than election results.
“Party platforms often give the markets more important information than the name of the winner or loser of the general election. Investors will try to determine which party is likely to be in power, and how that will benefit industry sectors of the market.”
