To many, this election season feels different from any election cycle in recent history. Some are concerned that if Trump wins the election, he could upset financial markets like he has upset the Republican Party establishment.
This year we have seen dramatic surprises and turmoil within the Republican Party. Early on in the election season, Donald Trump’s campaign was viewed by many as a publicity stunt and few took it as a serious threat to more traditional and politically experienced Republican candidates. This year’s primary cycle changed that, as Trump outpaced a wide field of candidates and was able to secure the nomination without even lining up with the party’s platform on many issues. The party establishment was not expecting or remotely ready for such a non-traditional candidate.
(Many consider Bernie Sanders’ challenge to the Democrat Party establishment as similarly historic. Our discussion focuses solely on Trump simply because he is on the ballot in the general election and Sanders isn’t.)
Whether you like her or don’t like her, Hillary Clinton is a relatively known quantity, whereas Donald Trump is a much lesser known quantity, partly because he is a Washington outsider with no political track record and partly because his positions on various issues have been quite fluid from day to day. Financial markets do not respond well to uncertainty, so it is natural to be concerned with how the markets may respond to Donald Trump.
In this Perspectives we explore a few questions. Are we really in unprecedented territory? And, does it matter to the financial markets who wins the election?
Dramatic and Sudden Political Party Change
While this year’s events may seem hard to fathom, and some even question how the Republican Party will reunify following it, let’s explore another time in history where dramatic stress and transformation occurred within a major political party in a very short period of time. If we look back in our nation’s history to the 1850’s, the Whig Party was the second major political party, and the Republican Party did not yet exist. The term “whig” means “opposing tyranny,” and the party’s platform was based on advocating for a strong Congress to keep the Executive branch in check. Presidents elected from the Whig party include: William Henry Harrison, John Tyler, Zachary Taylor, and Millard Fillmore. Abraham Lincoln was a Whig before he was a Republican. In fact, he was the first President ever elected in the newly formed Republican Party shortly following the Whig party’s collapse.
The Whig party collapsed largely due to disagreement within the party over the issue of slavery. Disagreement proved so divisive that the party fell apart within a few short years. Interestingly, in the political vacuum that existed after the Whig party collapsed, various political groups emerged advocating a variety of nativist stances, including barring immigrants from public offices, as well as halting the immigration of Catholics and Chinese. (Does any of this sound familiar? Muslims and Mexicans anyone?) Parties that were built on principles of nativism did not endure, and the Republican Party emerged out of this fractionalized environment to restore equilibrium to our democratic system, which seems to work best with two powerful parties that balance one another.
It is important to note that we are not predicting that the Republican Party will cease to exist like the Whigs did. We don’t know that, and we’re not in the business of making predictions, especially political ones. What we intend to convey is that whatever the current political stresses lead to, global financial markets will adjust to them, just as they were able to endure the rapid change in the political parties in the 1850s. In fact, there is no record of any market correction that occurred in response to the Whig party collapse. Market declines did occur in that era, but they were driven by independent economic and business-related forces like wheat shortages, a burst bubble in railroad stocks, and the ripple effects of a collapse in the British economy rather than by political stresses. We believe that business and economic cycles will continue to have a greater impact on investment portfolios than the political process will have.
Surviving a Brash Personality
Many argue that Donald Trump is too petty, sexist, racist, reckless, or fill in the blank to be President. And maybe he is all of these things and more (or, rather, less). Even so, this is not the first time in our history that we have dealt with a brash candidate. Consider Andrew Jackson. Although revered for bravery by some, he left a wake of conflict in his path as well.
Prior to his presidency, Andrew Jackson was the veteran of at least 13 gun duels. His body was so full of lead that people said he “rattled like a bag of marbles.” Dueling was quite common for politicians. According to the book Gentlemen’s Blood: A History of Dueling, “Men in public life called each other, not just the traditional ‘liar,’ ‘poltroon,’ ‘coward,’ and ‘puppy,’ but also ‘fornicator,’ ‘madman,’ and ‘bastard;’ they accused each other of incest, treason, and consorting with the devil.”
Once elected, Jackson continued to generate controversy. Considered the common man’s president, after his inauguration, he threw a party at the White House that was open to all of his supporters, including the general public. This party is described by the White House Historical Association in the article, “Not a Ragged Mob; the Inauguration of 1829.”
The surging crowd made mingling impossible, and as people pushed toward Jackson and lunged toward refreshments, they collided with fragile furniture and shoved servants laden with punch bowls and trays of food. Waiters trying to maneuver with a large bowl of spiked orange punch crashed into a crowd and spilled it all on the carpet. Men in work boots, straining to see Jackson, stood on expensive upholstered furniture.
The “common man” had come to the capital to revel in the installation of a popular champion as chief executive. Washingtonians, generally, were not so cheerful, deeming the admired champion a backwoods barbarian, his associates cronies, and his followers an uncivilized horde.
It is probably safe to say that more than half of those present at this inauguration party were considered deplorable by the political establishment. Regardless, the White House survived this party and the U.S. Presidential institution survived a brash individual like Andrew Jackson. Most relevant to our conversation, the economy and markets survived as well.
Do Markets Care Who is in Office?
Market volatility tends to spike anytime that ambiguity exists. Anticipating election outcomes entails inherent uncertainty, so it should not be surprising that market volatility tends to increase during election years. What is less commonly known is that volatility usually settles down shortly after the election once the uncertainty of the voting outcome is resolved.
Debate will likely continue to rage regarding whether Republican or Democrat administrations are better for business and the markets. The reality though is that it is incredibly difficult to decipher how much impact the President even has on the markets during their administration. No President is able to act unilaterally and push all of their desired policies through Congress, and the effects of implemented policies take time to play out. Additionally, there are always a multitude of economic factors at play in the markets during any administration.
Most important in terms of addressing near-term concerns, the outcome of Presidential elections has not historically resulted in long-term declines in financial markets. What is more, over the long run, history tells us that it doesn’t matter which party is in power, with equal returns of 11% for the stock market over both Democrat and Republican administrations.
This may be hard to accept. Indeed, it is natural to believe that markets do better under whichever party we personally favor. One interesting study by Gallup surveyed 60,000 individual investors at a major brokerage firm over the time period 1991 – 2002, a period that covered three election cycles. As summarized in the Wall Street Journal, the study found:
After the 1992 and 1996 elections, when the Democratic candidate won the presidency, Democratic voters tended to have greater confidence about the future of the economy than Republican voters. That confidence translated into their being willing to incur more portfolio risk, to favor the stocks of domestic over foreign companies and to trade less frequently. At the same time, Republicans were less confident about the economy and therefore tended to do the reverse of what Democratic voters did.
When the Republican candidate won the 2000 election, the opposite pattern emerged: The Republican voters tended to incur more risk, favor domestic companies and trade less frequently.
As usual, our own human biases impact our perceptions, and being aware of this is the first step to making good investment decisions. Whatever the outcome of November’s election, we believe that patient and disciplined investors will continue to be rewarded over the long run.
It is important to distinguish that we are not saying that it doesn’t matter who wins November’s election or that one should be apathetic in their voting. Likewise, there are certainly more issues to consider in casting your vote than just which candidate might be good or bad for financial markets. We are simply communicating that financial markets are incredibly resilient and adjust to different Presidential administrations. After all, any administration can only be in power for 8 years, which isn’t forever. Whether Clinton or Trump wins in November, markets will be able to look beyond the current administration to the future.
We realize it is possible that we may experience significant short-term volatility in the financial markets because of uncertainty surrounding the election, which is unnerving as an investor. As we have repeated often before, we believe that keeping one’s sights on the longer term is always the best strategy. Trying to protect oneself by predicting the market’s near-term movements is not only impossible, it is unsafe and a common cause of poor performance.
As we move through this election season please let us know any thoughts, questions, or concerns that you have. Your comfort with your portfolio’s positioning is always important to us.