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Watching the Election Returns

Strategas' Economic Outlook

Whether we have the re-election of a president or the election of a new president coming up in November, either scenario could have a significant impact on the types of policies enacted into law or through regulation. As such, the financial markets will be watching the election closely.

Going back nearly 100 years, we have found that the S&P 500 not only monitors the election in the final three months of the election cycle but has even been a good predictor of presidential election results. If the S&P 500 declines in the three-month period prior to the November election, the incumbent party has generally lost, and if the S&P 500 has been up in that period, the incumbent party has generally won. This metric has correctly predicted every presidential election winner since 1984, and 87 percent of the winners since 1928.

We believe this metric works because financial markets dislike uncertainty, and if the market expects a new president, investors are uncertain about the policies of that new president. However, after the election, stocks have tended to trade up regardless of whether the incumbent party or the opposition party won. Six months after the election, the market has on average been up, regardless of which party won the election. However, the trend is stronger if the incumbent party won.

Still, elections can be difficult to predict, and we expect this presidential election to be closer than the polls may be suggesting. In addition, this year, control of the Senate could be a nail-biter. While Democrats are playing offense in a number of Senate races, if they do win control of the Senate, given current polling, they may only have a narrow one or two-seat majority, or it could be an evenly split Senate with the vice president serving as the tie-breaking vote. Which party controls the Senate, and by how much, will also be key to what types of policies can be enacted by the president, which means investors should be watching Senate control very closely.

Looking back at S&P 500 performance since 1933, stocks have been able to produce more than 13 percent average annual returns under various political configurations of the presidency and Congress. Specifically, the political configurations that have performed best have been:

1. A Democratic Senate, Republican House, and a Democratic president
2. A Republican Senate, Democratic House, and a Republican president
3. A Republican Congress with a Democratic president
4. Republican control of Congress and the presidency.

The average annual return with Democrats in control of Congress and the presidency is about nine percent. Note also that one of the possible political configurations that could arise from this year's election – a Democratic House, Democratic president, and a Republican Senate – is a rare occurrence, one that has not happened since the late 1800s.

Ultimately, elections matter more for sectors and individual companies. For instance, under President Trump, companies that were subject to a higher tax rate before passage of the Tax Cuts and Jobs Act benefited from Trump's lowering of the corporate tax rate to 21 percent. Under a Biden administration, those companies are at risk of a higher corporate rate, as Biden has called for raising the rate to 28 percent. However, Biden would need a Democratic-controlled Senate in order to do so. Similarly, fossil fuel companies would fare better under a Trump administration, with Trump pushing for policies that would be amenable to the industry, while renewable energy companies would fare better under a Biden administration.

Elections and the policy preferences of a president do not operate in isolation. National and international economic conditions influence what policies are enacted both in the United States and abroad, which can then impact stocks and sectors. An economic downturn in the U.S. or abroad, tightening financial conditions, and geopolitical conflict will also impact which sectors will outperform. While all eyes are on the elections this November, keep in mind that they are not the only factors worth watching.

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