The Bottom Line:
Presidential election cycles always unnerve investors. The special circumstances of 2020 add exponents to this condition. Unfortunately, anxiety often leads to over-activity as the more we fear, the more we act to defend. Investors afraid of Presidential elections often become afraid of their own investments. Fortunately, history provides relief as resourceful corporations reflexively adjust strategy to produce the profit growth investors require. Whether Trump or Biden wins in November, intrepid investors will win out over time. At least they always have.
The Full Story:
Every four years, we as Americans hit the polls to select a President. Every four years, we as investment advisors hit the phones to reassure our investors. This political season carries even more trepidation than usual as the media has successfully divided us into bellicose tribal factions. Trump vs. Biden. Capitalism vs. Socialism. Black vs. White. Men vs. Women. Religion vs. Science. Coasts vs. Plains. Dependence vs. Independence….and on and on. We have all been categorized into advertising targets by smart bots catering to our biases, or assumed biases, based on our stations and locations. I am not doubting the legitimacy of anyone’s convictions, as I certainly have my own. I am just acknowledging the firehoses full of accelerant aimed at enflaming them. Once enflamed, our convictions power oversized actions and reactions. Post! Protest! Isolate! Attack! Self-Protect!…Buy! Sell!…You know the drill. So this week, to help offset the hysteria hydrants on high, I thought I’d provide some thoughts on the politics of investing.
Economic Speed Does Not Determine Stock Market Speed
Intuitively, a more robust economy provides ballast for a more robust stock market, but the correlation is less than you would imagine. Check out the chart below:
Yes, the swiftest economic expansion did provide the best overall return at 21.8% annualized, but the slowest economic expansion (just ended) produced better than average returns at 15.2%. The slowest rates of investment return during economic expansions actually congregate in the middle of the chart, and mathematically there is only a .26 correlation between GDP growth rates and investment returns on a calendar year basis. Many inputs mix to influence stock returns, GDP growth among them, but GDP growth rates on their own do not determine investment return rates. Therefore, policies that potentially restrict economic growth rates will not necessarily restrict investor return rates.
We Invest in Companies, Not Governments
The benefits of globalization enable companies to establish operations worldwide, seek out customers worldwide and structure governance systems worldwide to maximize profits and efficiency. Burger King headquarters in Canada. Medtronic headquarters in Ireland. Seventy-five percent of Fortune 500 companies have at least one tax subsidiary, and collectively maintain nearly 10,000 different foreign subsidiaries to diversify tax and regulatory exposures. Forty percent of revenues for US companies originate offshore. Within the technology sector, nearly 60% of revenues originate offshore. US companies may list on US exchanges, but their operations, tax regimes, regulatory regimes and customers span the globe. Policies that restrict corporate performance here will just lead corporations to shift resources there.
In the Longer Term, It’s All the Same
New presidents often install new policies. New policies require acclimation and installation. This tends to lessen investment returns for the first two years of a presidential term overall as the economy adjusts (7.7% for year 1, 7.9% for year 2). Conversely, the last two years in a presidential term tend to focus less on policy and more on re-electability (8.7% for year 3, 9.1% for year 4). However, we can draw some conclusions about Republican policy impacts versus Democratic policy impacts by looking at the first two years. Republican sweeps (White House, Senate, House) have produced 12.2% annualized returns over the first “policy-heavy” two years, while Democratic sweeps (White House, Senate, House) have produced a lesser 3.4% annualized return. This could validate Republican claims that the Republicans are better for the markets. However, over four years, the returns converge with 8.6% annualized for Republicans and 8.2% annualized for Democrats. This “reversion to the mean” should encourage investors that while policy may influence returns over short periods of time, corporate adjustments mitigate policy effects over long periods of time. Takeaway: Investors should not underestimate the resourcefulness of the US private sector, no matter what the policy array.
Have a great weekend!
David S. Waddell
CEO, Chief Investment Strategist