18 Mar 2016 Presidents and Markets
Every four years about this time a popular question arises – ‘if so-and-so is elected, how will the stock market react? It’s a fair question because presidents set the tone for government policy for the coming four or eight years. These policies can be beneficial or harmful to various businesses and industries, directly impacting their profits and stock prices.
On a larger scale, the new president’s policies impact for good or ill, both the short- and long-term growth potential of both domestic and global economies. The reference to time is important because US government policies have both intended and unintended consequences that may take years to impact the economy.
Some policies, such as government spending, can have immediate impact on companies, jobs and economy, while others like regulations and taxes – imposed or lifted, generally take longer to impact businesses, jobs and the economy. The lag effect of some partly explains why we oscillate from one party to the other when results do not come fast enough or when perceived harmful ‘excesses’ have gone on long enough.
It is commonly believed that Republican presidents, the ‘party of Big Business,’ are better for the stock market and the economy than are Democratic presidents. At least during their respective terms, this is not the case.
According to a recent study by Wen-Wen Chien, Roger W. Mayer, and Zigan Wang, since 1953 (eliminating the huge impact of WWII and the Great Depression) the four-year terms of Republicans have experienced cumulative economic growth of 11% while Democrats have experienced cumulative economic growth over 15%. The study revealed that the stock market’s performance immediately following a presidential election proved to be a good predictor of how the economy would perform during the president’s term and the relationship has strengthened over time.
But remember, timing has everything to do with policy results. Markets generally respond quickly and positively to government spending and again, generally, Democratic presidents tend to be bigger government spenders, thereby gaining the benefit of rising markets predicting better economies ahead. However, stock market investors are relatively near-sighted. They are not overly concerned by the fact that government debt may be rising to support some or all of the increased spending or the impact that rising taxes might have on the will and ability of individuals and companies to spend and invest.
Republicans, on the other hand tend (in principle anyway) to be more restrictive in government spending, the size and role of government, and at least in theory, its debt. The advent of a Republican president suggests to the market, and many of the nation’s largest industries largely dependent on the government, that their biggest customer is going to be tightening its belt. In other words, their part of the economy may well shrink for a while. Broadly speaking, Republican policies that are intended to improve the fiscal health of the nation, have a more immediate negative effect on the near-term economy, while intended to improve its long-term health and resiliency. As a result, the market as report card signals economic slowing. It may take years for the positive benefits to be realized by less taxed individuals and companies. And unfortunately, few will recognize how important earlier policies were in laying the foundation for the current good times, mistakenly crediting the current occupier of the Oval Office.
There are so many significant variables that move an economy and markets that no one man or woman can lay prime claim to its ultimate performance. Wars, global booms and busts, technological advances, weather, and a host of other large-scale influences can alter the best or worst efforts of presidents. However, influential presidents of both parties have left indelible influences through their policies and legislation, regardless of extraneous events and influences.
To acknowledge that the current field of likely candidates, Clinton, Trump, and Cruz does not fit neatly into the historical record is indeed an understatement. While impossible to know how each would lead, some very high level observations might be interesting. It is my fervent intention to remain independent of political bias or editorial beyond how results might impact our investments.
Clearly the most ‘establishment’ of the three and a political heavyweight, Hillary has been closely involved in national politics at the highest levels for a quarter of a century. If she adopts the political strategy of her husband, Bill Clinton ’92 and ’96, she might well prove a more centrist, compromising leader than her primary rhetoric suggests. It is also pretty clear that she is no enemy to big banks and business. How her policies would translate into spending and taxes depend on both her leadership and what happens to majorities in the House and Senate.
Hmmmm. Clearly the least establishment of the three politically, but Trump is ‘Big Business.’ Many of his positions on government spending are well beyond traditional Republican principles and in some cases may be beyond those of Hillary’s. But so far anyway, markets have very little to go on (aside from his policy-lite bluster) in predicting how a Trump presidency policies would impact both ours and the world economy – there’s some good, some bad, and a lot unknowable.
Mr. Cruz is clearly the most conservative of the three. As a Senator he took bold stands against the ‘establishment’ on conservative principles during a difficult time for our nation following the Great Recession. It didn’t plan well politically as many Americans were clearly less interested in principles than they were in putting food on their tables. He has said he would cut taxes, abolish the IRS, and increase the military. Each of these would be immediately positive for the economy and the markets. The long term impact would depend on the more difficult medicine of cutting government programs and entitlements to enable the tax reductions and debt pay-down.
In the end, the future is unknowable, which is why we spend so much time discussing what-ifs, priorities, ranges of acceptable responses, and studying the probabilities of each. We have only one vote in our country’s next president, but so much more control of how we will live and enjoy our lives. Let’s get together soon to talk about the things we can control for a better future.