I began this column the day after the great Harris/Trump debate. Based on the publishing schedule, you might be reading it just before the U.S. election. A lot can happen in both politics and the markets over a six-week period, but I thought it would be an appropriate time to review how politics may or may not influence markets.
A post-debate poll had 63 per cent of viewers indicating Harris won the debate. This was the mirror image of the previous Biden/Trump debate, where 67 per cent said Trump won. Being a politically interested individual, I watched both debates in their entirety and would concur with the poll numbers. Trump didn’t change much between the two debates, but Harris was exponentially more dynamic than Biden.
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Decoding the science behind the story
Some days my job becomes a bit like codebreaking: I have to take the specialist language of science and translate it into something useful, not just readable.
Markets can react, and/or overreact, quickly, and the day after the debate, alternative energy stocks soared, with First Solar (FSLR) up 15.3, Albemarle (ALB) up 13.4 and Enphase Energy (ENPH) up 5.7 per cent (disclosure: I own ALB and ENPH), based on the perception that a Harris win would fuel alternative energy. A day later, all three stocks gave up some of those gains as reality replaced enthusiasm.
While there can be swift short-term gyrations to political events, what are the long-term implications? Counterintuitively, for 97 years from 1926 to 2023, the S&P 500 averaged 14.8 per cent gains with a Democratic president and only 9.3 per cent with a Republican president. Republicans held office during both the Great Depression and Great Recession, skewing the data, but nonetheless this data would favour Democrats.
During U.S. election years, the S&P 500 gained 16 per cent when the incumbent party won, and only 6.4 per cent when the presidency switched parties. This is likely, however, more chicken than egg. Electors tend to throw out parties when the economy is bad and keep incumbents when the economy is good. The data is more likely the result of the economy at election time, than of a response to the election.
Furthermore, the S&P 500 returned 14.1 per cent in years when the same party controlled both the presidency and Congress, whereas it returned a more modest 10.2 per cent with a divided government, dispelling the notion that gridlock is best for the markets.
Income by outcome
This begs the question: does it really matter which party is in power? Would it be wise to sell if Trump wins the White House and the Democrats win Congress? Based on historical numbers, this would be the worst outcome for the markets. Observing total returns, even under this scenario and if history repeats, which is not guaranteed, stock returns remain vastly superior to bond or cash returns. I will remain politically agnostic to the U.S. election outcome in my investing strategies.
From a shorter-term, one- to three-year perspective, governments have limited influence over markets at large, although they can influence investor sentiment on different sectors, like the alternative energy sector example above. Another clear example was the healthcare sector during the Obamacare debate. Fear drove health insurance stocks down, which created an optimum time to buy, as they rallied when the dust settled.
From a longer-term perspective however, politics clearly matters, as the countries of Argentina and Venezuela illustrate. These were once amongst the wealthiest countries in the world until they succumbed to the allure of socialism. From my investor perspective the Democrats have shifted left, but not radically so. My biggest gripe with the Biden administration is how it cancelled Keystone XL, then spent the rest of its mandate working to keep oil prices down by raiding the Strategic Petroleum Reserve, ignoring Iran sanctions now exporting almost four times more oil than in 2020, and entering into a new agreement with Venezuela in exchange for free and fair elections, which did not happen. There are significant geopolitical implications around these items beyond the scope of this article.
Meanwhile
Turning to the Canadian situation, we may face an election anytime over the next year. The Canadian market has not performed well this past decade, with 7.5 per cent annual returns versus 12 per cent for the S&P 500. This lags Canada’s longer-term performance of nine per cent annual returns. It is, however, comparable with other developed-world markets as the S&P 500, on the strength of large tech companies, has trounced other markets. Canada continues to lag other developed countries in per-capita GDP, with declines in eight of the last nine quarters. Per-capita GDP equates to our standard of living. It is highly unusual for this measure to decline in a non-recessionary period, and effectively means people are indeed in recession.
I believe if we experience the anticipated political transition, the Canadian market over the next decade will narrow its performance gap with the U.S. That makes me less politically agnostic in Canada.
