Investment Insights: Partisanship & Presidency Term Year
09 November 2018
By Cliff Aque, CFA, Investment Strategist
One uncertainty was removed from the markets this week, as the midterm election came to a close. The end result was what most prognosticators had expected, with the Democratic Party taking the majority in the House of Representatives, while the Republicans maintained control of the Senate. The financial markets reacted positively the following Wednesday, as the S&P 500 Index rose over 2%. Since 1942, the stock market has generally risen over the twelve months following mid-term elections, and in the four instances when the House and Senate were divided, the average return was 23.6%. This shows that markets generally like gridlock, because fewer legislative changes are passed.
The returns in either case are high when compared to the average annual return since the end of October 1942 and October 2018 of 11.6% when dividends are reinvested. Some theorize that presidents try to make their third year the best to enhance their party’s prospects of reelection. Whether this is true or not, real GDP growth has been highest, on average, in the third presidential year and stock market returns have followed a similar trend, averaging a gain of 19.5%. This compares to 8.8%, 10.2%, and 10.5% for years one, two, and four, respectively from 1940 to 2016 (to capture full presidential terms). While this is interesting, it may or may not have a bearing on what we should expect in 2019, but fiscal stimulus will remain a tailwind next year.
Partisanship is here to stay, which means that volatility is as well. However, the fundamental backdrop is still favorable in the U.S. The President’s trade policy has also contributed to volatility, but it was popular with Republican voters (75% approve of the way Trump is handling trade1 ), and used successfully during the elections to garner voter support. With the elections behind us, it will be interesting to see if the rhetoric is toned down or ratcheted up, as House Democrats generally support protectionist policy. Two things both parties support is improving America’s infrastructure and lowering the cost of prescription drugs, and an agreement around either could provide a further boost to the economy.
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