It is a Presidential election year and once again we are fielding many questions about the impact elections will have on the market. If Biden wins will the market crash? What about a Trump win? Will the uncertainty alone but enough to derail the recovery in the economy and the markets? Will political polarization tear the country apart? Although the candidates are the same from 4 years ago, the country is in a different place. Economic data appears to confirm a strong economy and falling inflation, but politics remains a key risk item for 2024.
Despite the many articles on the subject, history does not teach us much about the behavior of the market in the months leading up to the election. There are simply too few elections to obtain any reliable statistics or even reliable trend. There are many more variables, more critical variables, impacting stock prices. Politicians like to place blame and take credit for economic performance, but the truth is that presidents likely had very little to do with the performance of the stock market.
What history can teach us is that through a myriad of trials, and through innumerable law changes, companies do figure out how to make money. It is important to remember that corporate earnings drive stock prices. It is that creative ingenuity that we tie our investments to, not the political winds of one party or another. In the face of political uncertainty, I for one, take some comfort in this fact.
History also teaches us that presidents do not have total control and there is arguably too much emphasis on the presidential election. The president is not a king, and it is rare for one party to have the House, Senate and Presidency. As a result, Washington is known for its gridlock, a characteristic frustrating to politicians, but often welcomed by markets. Markets love stability, the byproduct of gridlock. America’s founders were geniuses, parsing power so that it would be difficult for one person or party to rule by fiat. This is an important lesson for those too focused on the presidential election.
However, there are issues that matter to investors. Over the coming months we will be analyzing the policies of each candidate, and the potential tax and investment implications for each. For example, one persistent issue remains the massive deficit spending of the federal government. It is clear that the current deficit spending of the federal government is highly stimulative but cannot continue at current levels. Either taxes will need to go up or spending will need to decrease. Obviously, higher tax rates will increase the importance of tax strategies for high income earners. Conversely, lower government spending could lower overall growth and impact some sectors more than others. The economy could weather either option, but investment strategies may differ.