CTSIX’s Nelson on Politics and the Markets

With the presidential election now less than one year away, investors are beginning to contemplate what a change in the country’s leadership could mean to the stock market.

“I wouldn’t suggest using election-related data as one’s only guide to portfolio positioning,” says Brandon M. Nelson, CFA, “but instead, consider it one of many important pieces of the investment positioning puzzle.”

To Nelson, Senior Portfolio Manager of Calamos Timpani Small Cap Growth Fund (CTSIX), there are three key questions:

• How does the stock market typically perform during the various years of a presidential term?
• What are the implications for the first few years of the upcoming new decade?
• Does the stock market perform better when one political party controls the White House, Senate and House of Representatives or do investors prefer some sort of political gridlock among the entities?

Nelson offers the chart below to address the first and second question.

The chart segments 118 years of Dow Jones Industrials’ performance by years of the presidential cycle while providing a roadmap for the first three years of the new decade.

“What caught my attention the most,” says Nelson, “was the predicted surge that begins in the middle of the election year and lasts through the middle of the year after the election. Then, it looks like we would be in a trading range through the end of that year, only to begin another surge starting near the end of the second presidential year.”

He turns to the chart below for insight on how investors react to two scenarios. The chart shows the average annual S&P 500 returns during the years when one political party controlled both the White House and both houses of Congress versus when there was political gridlock. The finding: Stock market performance since 1928 through August 2018 was similar in both scenarios, with political gridlock only slightly outperforming.

“As it relates to impact on the stock market, perhaps today’s day-to-day political jaw-boning is getting far too much attention,” says Nelson.

“With a moderate growth economy, an accommodative Federal Reserve, and reasonable valuations, we continue to think it is wise to have exposure to the stock market—especially to small caps which continue to look extremely inexpensive versus large caps,” he says.

Geopolitical and political considerations are likely to factor into market and economic performance over the next 12 months. We look forward to providing you with ideas for keeping your clients’ portfolios moving ahead, regardless of politics. Financial advisors, for more information, talk to a Calamos Investment Consultant, call 888-571-2567 or email caminfo@calamos.com.