Last Wednesday saw the first presidential debate, which was eventful to say the least. Today I would like to examine a question that always arises when election time rolls around once more – what effect will the result have on the markets?
The short answer is very little. In this post I will explain exactly why.
Market performance under various presidencies
Since 1929, the S&P 500 has only seen negative returns under two presidents – Herbert Hoover (1929-1933) and George W. Bush (2001-2009). Seven Democrats and seven Republicans have served as president in this time, and the S&P 500 compounded an average of +10.3% per annum during that time, regardless of which party held the White House.
Additionally, if we take a typical Bell Capital portfolio, which is comprised of both equities (US and non) and fixed income investments, the number of negatively returning Presidents drops to just Herbert Hoover – who of course had the Great Depression to contend with.
Initial market reaction vs long-term performance
The day after Barack Obama was elected in 2008, the S&P 500 declined over 5%. It further declined nearly 25% through the course of November. Within the first few months of his Presidency many people were predicting an economic landslide that would drive the US economy back into crisis. In reality, the S&P 500 experienced an annualized return of 14.4% over the span of Obama’s two-term Presidency, and a cumulative gain of 194%.
A similar reaction occurred when Donald Trump was elected in 2016. The day following the election, markets were halted in pre-market trading down 5%. Once again alarm bells were rund yet, as some might recall, the market actually finished up +1.1% that day. The S&P 500 has experienced an annualized return of 13.6% to date since Trump’s election, and a cumulative gain of 62%.
The US is not a primary market for many US companies
This may come as a surprise to some, but the US is actually a minority market for many of the most iconic American businesses. For example, McDonald’s, Coca-Cola, and Apple derive only 37%, 38%, and 39% (respectively) of their last twelve-month revenues from the US. In fact, only 60% of S&P 500 business revenue is derived in the US.
Though a company may be based in the US and listed on a US stock exchange, for many the fact of the matter is that the majority of their business is done overseas. Thus, whilst it may seem logical to think that US politics will have a significant effect on a US company, we need to expand our thinking more globally.
Conclusion
The evidence shows that who wins the US presidential election does not have a significant impact on your financial investment portfolio in the long-run.
At Bell Capital we always stress the importance of making logical financial decisions rather than emotional ones, and this is a prime example. Do not allow the election season or who eventually wins to affect how you go about building wealth for your long-term future.
