We’re one day in to the transition from Donald Trump to Joseph Biden as the new President of the United States. No matter whether you voted for or against him, the natural question all investors are going to be trying to answer is what a change in national leadership means for the economy and therefore the markets. The fact that Biden comes to office in the midst of an ongoing health crisis and consequent, continuing questions about the impact on small business, still-high unemployment, and a political landscape that has gotten even more bitter and divisive than it was four years ago only adds to the intrigue of the next few months.
I grew up watching Jimmy Carter, and then Ronald Reagan take residence in the White House, and admittedly, most of my perception of them, their political parties, and their influence on America’s economy came from what I could glean from my parent’s attitudes and opinions. Because of my youth, I came away with a pretty narrow view that can be summed up pretty simply:
- Democrats are good for social causes and progressive reforms. They also prefer centralized federal authority and power, which is harder on the economy and bad for business.
- Republicans prefer limited federal authority, which enables the economy and is good for business. They are less committed to social causes and progressive reforms.
For evidence of these views I simply contrasted what I could see as U.S. economic progress (or the lack of it) during the Carter years versus Reagan years. I knew that a lot of my friend’s dads struggled to find work when Carter was the President, and I remembered the long lines of cars at the gas station because of the energy crisis that lasted through most of the 1970’s and into the early 1980’s. Both of those situations changed dramatically while Reagan was in office, and Reagan’s speeches about lower taxes and “trickle-down economics” made sense to me. Being young, I was sure I had things all figured out.
Later, now a young adult, I watched with dismay as William J. Clinton took the oath of office. After eight years of what I saw as unbridled success under Reagan, I was severely disappointed by George H.W. Bush’s inability to beat the younger governor from Arkansas. Clinton’s views on practically everything from military spending to education to healthcare were at odds with my own, and I found it hard to believe that the U.S. could do anything more than sink back into the horrid straits I associated with Jimmy Carter and the Democratic party.
Not long afterward, I got my first job in the financial world, working for a major mutual fund company and discount brokerage, which put the market and its movements right in front of me every day. I admit that I watched with surprise as the economy, and the market rallied during Clinton’s first term, then continued even further during his second. It was the first time that I was forced to question those simplistic political and economic assumptions I had formed as a youth.
With the passage of time and a little more experience under my belt, I have, of course come to understand that while Presidents and politics certainly wield influence that impacts the economy, and therefore the markets, it’s a mistake to associate economic or market performance with a specific party, or completely to a presidential platform. You really have to take a much closer look at things to truly identify what drives the market at any given time, and how much the current political climate plays in a role in that momentum.
The latter years of the George W. Bush administration, followed by practically the entirety of the Barack Obama administration, I think are a good example of what I’m referring to. In 2008, to counter the housing crisis that triggered the worst global financial crisis since the Great Depression, the Federal Reserve began implementing the “quantitative easing” policy that didn’t end until October 2014. While it didn’t provide an immediate lift, that policy provided a basis for the market to finally bottom out in 2009 and begin a new upward trend that has really only been threatened once, from mid-2015 to mid-2016. So who deserves the credit – Bush, who was in office when the policy started, or Obama, who has been at the helm until now? I don’t believe the answer is that simple, since while the President can appoint a new chairperson to lead the Fed, that individual neither answers to the President nor leaves office when the President does. The general intent of the Fed is to make its decisions outside the political framework, based strictly on economic measurements and guidelines (whether or not it actually succeeds in that intent is a different matter that I won’t get into). I believe Fed policy, more than any political party or presidential influence, has driven the market for the last eight years.
That initial experience I had while Bill Clinton was in office is another good example of the problem you can get yourself into by assuming that one party is better than another for the economy or market. When I took the time to drill down into some of the things that drove the growth of the U.S. economy through the 1990’s, most seemed to incidental to the Democrat in the White House. The rise of the Internet and the World Wide Web, for example, sparked a degree and kind of innovation throughout the world that has created a completely new economic segment. And while Democrats might want to take credit for the fact that the federal budget was balanced in 1995 and from 1998 to 2001 operated with a surplus, along with a significant reduction of the national debt during that time, the truth is that decreases in military spending (arguably driven by a Republican-dominated Congress), along with increased taxes and the economic boom of the decade were the biggest factors that created budget surpluses. Did those elements help the economy, and the stock market along? I think so; but to attribute them entirely to one party, or one president is as mistaken as were my simplistic, youthful political categorizations. It’s more accurate to say that it was a combination of Republican and Democratic policies, helped along by a once-in-a-generation shift in the business world that spurred an unprecedented level of growth.
The last four years have generally seen the markets stage an impressive performance, even when you factor the uncertainty of Trump’s trade war that sucked up much of 2018 and practically all of 2019, and the rapid, bear market plunge to start 2020 that came as a result of COVID. I saw a note at the beginning of this week that the market’s performance under the Trump administration was upstaged only by the periods covered by Obama and Clinton – both of whom served two terms in office compared to Trump’s one. It isn’t too surprising, then to see Trump supporters, and Trump himself claim credit for that performance, but I think that, just as in times past, there has a lot more at play than just the actions of the last administration.
We’ve seen a lot of speculation about whether Biden’s new policies will help the nation navigate its way out of the pandemic better than Trump’s mostly off-hands approach; he preferred to leave the details to state governments, while Biden clearly intends to be more hands on. It also remains to be seen if his push for continued stimulus spending, while at the same time rolling back a number of Trump’s policies will be beneficial for the economy, and therefore the market in general. That is a question that can only be answered by time, and anybody that tries to claim to know ahead of time how that is going to play out is making a fool’s bet. Another element that people like to pay attention to is how the market will respond during the so-called “honeymoon” period – the 100 days or so that the media uses as a benchmark for how quickly a new President settles into his job and starts putting things in place. As far as the market is concerned, the results are mixed. Here’s a look at the last forty years of presidential administrations and the relative market performance during their first 100 days or so in office.
|S&P 500 1/21||S&P 500 3/31||% Gain/Loss|
|George W. Bush||1342.9||1148.0||-14.51%|
|George H.W. Bush||284.5||292.5||2.81%|
It’s hard to look at these numbers and predict what kind of direction the market might take in the next 100 days from right now. If the last two administrations are an indicator, you might expect the market to drop. I don’t think that is any more reliable than expecting the market to drop with a Democrat taking office because the market dropped for two out of the three Democrats in the list, while it increased for two of the three Republicans.
A little more interesting to me, if still mostly anecdotal, is what the market did for the rest of each new president’s initial four-year term.
|S&P 500, first 100 days||S&P 500, four years|
|George W. Bush||-14.51%||2.39%|
|George H.W. Bush||2.81%||51.59%|
Again, it’s hard to draw any real conclusions. There seems to be little correlation between a new President’s first 100 days in office to how the market will respond to his administration during his next four years. You might be able to make a case for the idea that if the market responds positively during the first 100 days, the outlook for the next four years should be pretty good; but even then you have to concede that there are a myriad of other factors – many of which have little to do with the person in the White House – that have to play out favorably.
So where does that leave us? Pretty much in the same place we usually are; being ever watchful for new opportunities, ever hopeful for the future, and ever on alert for new risks that may appear. One thing has proven itself true for more than 150 years for investors, and that is that while presidents and political opinions come and go, the markets keep moving along, providing new, profitable opportunities for those who are willing to look for them.
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