For President, Who Would the Stock Market Vote For?

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Will Nasgovitz

Nasgovitz is CEO and Portfolio Manager of the Select Value and Mid Cap Value Funds and their corresponding separately managed account strategies. He also is CEO of Heartland Funds. He has 16 years of industry experience, 13 at Heartland.

Hi. Thanks for tuning into the May 2016 Nasgovitz Notes. Happy spring to all of you. We’re certainly awaiting spring here in southeastern Wisconsin. We know it’s coming.

We also know that an election’s coming here, just about six months out. And, in today’s video, we want to touch on a few things that are associated with the election that we think are important to your overall portfolio.

  • First, we’re going to touch on how the market usually reacts leading up to a presidential election
  • Also explore what the market prefers, either a Democrat or a Republican in the White House
  • And finally, we want to touch on the investment implications associated with all the three candidates that are still in the race

So, let’s kick off by looking at how the stock market reacts leading up to an election. Thanks to Ned Davis for supplying this chart.

S&P 500: Before & After Elections

Heartland Advisors Value Investing Market Insight S&P Chart

12/31/1927 to 11/6/2013, © Copyright 2016 Ned Davis Research, Inc. Election dates included are 11/6/1928, 11/8/1932, 11/3/1936, 11/5/1940, 11/7/1944, 11/2/1948, 11/4/1952, 11/6/1956, 11/8/1960, 11/3/1964, 11/5/1968,  11/7/1972, 11/2/1976, 11/4/1980, 11/6/1984, 11/8/1988, 11/3/1992, 11/5/1996, 11/7/2000, 11/2/2004, 11/4/2008, and 11/6/2012. Past performance does not guarantee future results.

You’ll see that the market tends to drift lower about three months leading up to an election. It gets a little more volatile. That’s because there’s uncertainty. There might not be uncertainty on who’s going to win the election, there’s just uncertainty in how the policies are going to be accepted by the broader government and what’s going to actually be rolled out.

So, look for that as we get to the final weeks and months of the election here this summer and fall.

OK, what about what does the market prefer? Do they prefer a Democrat or a Republican?

It’s commonly perceived that the stock market enjoys Republican administrations because Republicans are typically more in favor of lower taxes, less regulation. That should be good—right?—for the top and bottom line of corporations.

Guess what. Looking at this chart, again from Ned Davis, you’ll see:

  • The shaded regions, red being the Republican administration, blue being a Democratic administration
  • Looking at the Dow Jones Industrial Average over the last decade or more here
Dow Jones Industrial Average Index (DJIA) vs. Presidential Political Party

Heartland Advisors value investing market insight Dow Jones chart

12/31/1914 to 4/30/2016, © Copyright 2016 Ned Davis Research, Inc. Past performance does not guarantee future results.

You’ll note that Democrats have historically achieved greater returns when they’re in the Oval Office. There are lots of variables at play here:

  • Clearly the Executive Branch doesn’t control the broader economy or the global economy
  • Bubbles certainly have popped during administrations that they don’t have any control over, looking back at the “tech wreck” or the “great financial crisis”
  • It clearly matters who’s leading the Congressional side of things as well

But historically, Democrat offices have outpaced Republican offices.

Now let’s touch on the more pressing issues. What are the investment implications associated with each of the candidates?

Let’s start off with the one who’s getting the most media coverage: Mr. Trump. Mr. Donald Trump is in the news a lot. He’s talking about a lot of issues that certainly have both global macroeconomic and financial implications for the stock market. There’s not a lot of clarity. There’s not a lot of certainty, and I think that uncertainty associated with his flip-flopping on a number of issues could be a near-term headwind for the stock market.

Just to give you some examples: He’s called out some of our trading partners for potentially manipulating their currencies. That could have implications for the U.S. dollar if he were to be in the office. We don’t know if that will occur. We don’t know exactly, so I would anticipate this uncertainty causing some consternation in the broader markets in the near-term, until we get some more clarity on what he truly thinks about some of his economic policies and what that might mean for the stock market.

Now, what about Hillary Clinton?

Hillary Clinton obviously was in the White House with her husband in the early- to mid- to late-90s. The stock market was very strong during that time period. We don’t know if that playbook will play out with Hillary Clinton, but we do think there are some parallels.

Clearly health care was an issue of focus for the Clintons early on during their administration. And right now, just listening to the rhetoric out of the Clinton camp here on the campaign trail, they’ve clearly talked a lot about health care and pharmaceutical pricing. A number of specialty pharmaceutical companies have reformulated generics that have had massive price increases. There’s been a lot of ink in newspapers, media coverage of this, and Congressional hearings as well. We would anticipate that during the Clinton administration, if they were to win here in November, that there’d be more oversight and more regulation around this practice, and that could be a negative for this particular group.

We also think that there will be a continuation of many of the Obama policies as it relates to renewable energy—that’s something they’re in favor of—and more of headwinds for, perhaps, conventional energy, with more stringent regulations coming out of the EPA.

Last but not least, while he’s a longshot to probably win the White House, we want to touch on Bernie Sanders because some of his thinking might actually play into the Clinton administration.

One area that Bernie Sanders has been very vocal about is breaking up the big banks. He thinks there’s too much systemic risk. He thinks the banks need to be broken up. That would probably cause some price declines in these particular companies, but that would be interesting to us because perhaps the sum of the parts of these banks is worth more than where the stocks are today, or if they were to face downward pressure.

So, look out for that as it plays out here in the fall and into later 2016 and 2017.

Just to recap:

  • Historically the markets get a little more choppy, face some uncertainty leading up to the election. Plan on that in the summer and fall of this year.
  • And be mindful that the stock markets have historically enjoyed a Democratic White House. We don’t know if that will play out here in the fall timeframe. We don’t know how the market will react—lot of variables at play—but we think that’s a commonly misperceived notion by investors.
  • And last but not least, there are a lot of investment implications associated with each of the candidates today. Be mindful of them when you think about your portfolios, not only here but your broader investment portfolio.

We look forward to updating you on further capital market and economic themes later this summer. Thanks very much for tuning in.

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