U.S. election year politics loom over the markets in 2020

NEW YORK — A potentially tumultuous presidential election campaign promises to add some extra drama to financial markets this year, although if history is any guide investors can cast aside some worries.

The stock market typically rises in an election year, no matter which party claims the presidency. Overall, the S&P 500 has made gains in 78% of election years and the average gain is around 6%, no matter which party holds office since WWII. This year, Republican Donald Trump is seeking a second term and the S&P 500 has gained 6.6%, on average, since 1945 when a first-term Republican is running for re-election, according to CFRA Research.

Investors may want to pay particular attention to where the market stands about three months prior to the election. That period has been predictive of past election outcomes, according to several analysts.

Since 1928, an S&P 500 in the green three months before the vote has typically meant a win for the party holding the presidency, and a slumping index has meant a loss. That has held true in 20 of the last 23 presidential elections, including the five this century, according to LPL.

The Republicans came out on top in each of the three exceptions. In 1956, Republican Dwight Eisenhower won reelection although the market was down three months out; in 1968, Republican Richard Nixon defeated Democratic Vice-President Hubert Humphrey even though the S&P 500 was up 6% in the months preceding Election Day; and in 1980, Republican challenger Ronald Reagan beat President Jimmy Carter although three months before the election the market showed a gain of about 7%.

John Lynch, chief investment strategist at LPL Financial, says the three-month reading is a good benchmark since by then investors are clear about both parties’ platforms.

What the data can’t show very well are all the variables that go into an election year, such as who controls Congress and the nuances of politics.

“It’s one of those perfect examples of you can let data tell whatever story you want,” said Sam Stovall, chief investment strategist of U.S. equity at CFRA. “It is guide but not gospel.”

For one thing, the stock market tends to go higher, election or not. For all years since 1945, the S&P 500 has moved higher 71% of the time with an average gain around 9%, according to CFRA. And, as the popular investing adage goes, past performance is no guarantee of future results.

Investors should also note that the average election year gain is far short of 2019’s increase for the S&P 500 of nearly 29%.

The markets will pay attention to the early Democratic contests, starting with the Iowa caucuses on Feb. 3, but a clear picture of who will be the likely Democratic contender might not begin to emerge until March 3, or “Super Tuesday”, when primaries are held in more than a dozen states.

“Markets kind of trend sideways to down, then when we get clarity on candidates and the market tends to turn up,” said Tracie McMillion, head of global asset allocation strategy for Wells Fargo Investment Institute.

Investors will likely be focused on the same election-year issues that have always impacted markets in the past, including the candidates’ tax and fiscal policies. Several Democratic candidates have been proposing more taxes on the wealthy, prompting a range of angry and welcoming reactions from some high-profile CEOs and billionaires. Costs associated with climate change, infrastructure and health care policies are also issues that matter to investors.

Trade remains a wild card lingering into the new year as the end-game in the trade war between China and the U.S. remains unclear. Wall Street is expecting a Trump re-election, but his chances could be hindered if the dispute with China goes on without a resolution and hurts economic growth. Companies are still holding back on new investments and treading cautiously because of trade uncertainties.

At the moment, the recent escalation in tensions between the U.S. and Iran appears to have abated. But any major confrontation between the two countries could sink stocks as investors move their money into safer investments such as gold and bonds.

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