INVESTING WITH CLARITY® BLOG
September 29, 2020 4:31:34 PM
‘Tis the Season. Unless one is in the friendly confines of family or with those who think like you, the discussion of Politics can be quite messy. Unfortunately, too many investors conflate their political beliefs with their investment decision-making. These folks in essence become obsessed with measuring their level of determination on whether they should be invested or not on the results of a given election. This obsession usually becomes an impediment on the road to investors successfully reaching their goals.
As fiduciaries, our job is to remain acutely apolitical at all times, as our personal beliefs should have no place in how we manage client assets.
All that being said, we would be shirking our duty if we did not assess the potential outcomes of pending elections on all asset classes. So how do we remain unbiased yet at the same time provide substantive advice to our clients? It simply comes down to one word and that is, History.
The beauty of the Capital Markets is that they are guided by a principle known as “Reversion to the Mean.” This concept suggests that investment prices of all assets get stretched to both the upside and to the downside but at some point will eventually move back (i.e. revert) to their stated average or what we refer to as “intrinsic value.” Although always a moving target and up for debate on how to determine, this somewhat “shadowy” value has objective metrics tied to many fundamental factors. While not the topic of discussion for this article, the takeaway is we can assess how assets have moved in price swings under previous (past or historical) scenarios to gauge how they may perform in the future. Since no one can predict the future, we can use the principle of reversion to the mean and historical patterns as guideposts in how we assess forthcoming Presidential Elections and how they may possibly coincide with the move in asset prices based on previous outcomes.
That is the premise on which we base this article and address this “messy” subject matter and do so in the following four bullet points:
- History suggests it is time for a September Mourn – a take on the popular hit by Neil Diamond called September Morn in which the lyrics referenced a time of day (Morning) and where we reference a period of lamenting or “Mourning.” We do this because as of the drafting of this reading, we sit directly in the midst of a 7% “Correction” in the US Equity Markets and thus its usage in the title of this article. Being true to the underlying premise of using History to gauge the future, we seek to determine if this is common or if it is an uncommon phenomenon. Based on data gathered from Bespoke that can be obtained at www.bespoke.com, the month of September is historically the worst from a standpoint of returns. According to Bespoke, over the last 100 years, other than the month of May, at an average monthly return of -0.15%, at -1.12%, the month of September is the only other negative month and by a very wide margin the worst based on performance. Moreover, and again according to Bespoke, going back to 1928, whenever the month of August had a monthly return of 5% (in 2020 +7.17%) or greater, the month of September averaged an even worse return of -2.76%. Bottom line, history would suggest the month of September is typically rough, especially in Presidential Election years and even worse when following a very robust August.
- History suggests it is too Early to Project a Winner – as of the drafting of this reading, and according to PredictWise, the former Vice President holds a lead over President Trump of 6 percentage points. The same polling operation lists the likelihood of the Democratic Party taking the Senate at 15 percentage points and retaining the House at 65 percentage points. Although a Democratic sweep seems pretty likely at this point in time, we still believe it is premature to make portfolio changes on this potential outcome. We only have to go back to the most recent Election of 2016 and the Election of 1988 to once again use history as our guidepost. According to Gallop Polling Data compiled by Bespoke, Candidate Hillary Clinton held a steady lead over to-be President Trump throughout the campaign. Furthermore, Clinton held a 4 percentage point lead on the day of the Election. PredictWise had a Trump victory priced at 8 cents on the dollar. Candidate Clinton did capture more total votes, but Trump captured the White House by a decent margin in the voting as determined by the Electoral College. Another Election that followed a similar trajectory was the 1988 Presidential Election between the Republican Candidate in sitting VP George H.W. Bush and the Democratic Candidate in sitting Massachusetts Governor Michael Dukakis. According again to Gallop Polling and Bespoke, Dukakis held a commanding lead of 17 percentage points as late as August 1st only to see that lead evaporate by early September. Bush went on to win the election by 12 percentage points. We will not speculate on election outcomes unless they look to be highly probable. Our belief is this will be a very close election and will go down to the wire, thus our posture on not making any portfolio changes until the make-up of Congress and the White House is cemented.
- History suggests it is finally time to put 3 Election Myths to Rest – because the investment world is unfortunately wrought with emotions and much speculation, it is susceptible to folklore. There are three specific myths we would like to address and ultimately put to rest:
- Equity Markets like D.C. Gridlock – according to a historical review of the returns of the DJIA going back to 1900, Bespoke determined that in the 60 sessions of Congress over the last 120 years, there have been 34 times when one party held full control of Executive and Legislative branches. The Democratic Party held complete power in 20 sessions and the Republican Party 14 times. In those 34 periods of full party control, the DJIA averaged 7.85% per year, while in the 26 years of “gridlock,” the DJIA averaged 4.29%. In the periods of full Democratic control, the average annual return was 7.78%, while when in complete Republican control, the DJIA average annual return was slightly higher at 7.94%. This compelling disparity between 4.29% under gridlock and 7.85% under one party control should dispel myth number one.
- Equity Markets dislike complete Democratic Party Power – using the same data sources going back to 1900, there have been six times a Democratic President has succeeded a Republican President. The Presidents in order were Wilson, FDR, Kennedy, Carter, Clinton and Obama. In each of the six instances, that respective election also resulted in a Democratic Party sweep of both houses of Congress.
- Equity Markets prefer a certain Party to be in Power – this may just be the most common question that we receive yet is probably the most baseless according to historical data. Using the data analysis by Bespoke on the DJIA, and going back to 1900, the returns of annual average returns (ex-dividends) under all Presidents has been 6.6%. And you know what? That is the same average annual return of +6.6% under the 12 Republican Presidents and under 8 Democratic Presidents.
- History suggests building two Portfolios based on either outcome is Prudent – as we discuss in detail on page 4 under our Model Changes Section, we believe it is always prudent to prepare for any and all election outcomes. As opposed to speculating on a winner(s), we choose to build two portfolios before the Election, subject to potential policy proposals that may be forthcoming depending on a given outcome. We believe history shows that there is always opportunity no matter what party is in office, as certain businesses and industries will always find favor in Washington, D.C. It is our job to sharpen our pencils and put money in companies where proposals will benefit their respective business models. History supports this discipline, as a breakdown of the returns of the top six Presidents by cumulative stock market returns show that the markets under more laissez-faire leaders like Calvin Coolidge, Ronald Reagan and Dwight Eisenhower perform inline with more central planning leaders such as Franklin D. Roosevelt, Bill Clinton and Barack Obama. Depending on the period of time, the market responds positively to both relaxed regulations and tax cuts as they do to increased spending and monetary stimulus. Remember, as fiduciaries, our responsibility is to match policy with potential outcomes and not to choose what form of governing is best. We leave that for Sociologists to debate.
Thanks for taking the time to read our take on Presidential Elections. We hope it has been both profitable and enlightening. Our parting advice is to certainly be passionate regarding your political beliefs, and vote for your candidate(s) of choice. However, please don’t allow that passion to alter prudent investment and planning decisions, as emotional based decision-making usually is detrimental to investors when it comes to reaching our dreams and goals.
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