AUGUST 2024
Whilst stock markets are likely to see increased volatility around the US election in November, investors should stick to focusing on the economic and market fundamentals. A resilient US economy combined with the potential for near-term rate cuts are more important factors than which party ends up in power.
As the chart below shows, US stocks tend to continue higher during all administrations. Why? Because business returns, and therefore investment performance, are driven by economic growth, the cost of borrowing and the degree of competitive advantage, not whether the administration is Republican or Democrat.
Sure, politics can make things noisy and uncertain, causing short-term market gyrations. Over the longer term, however, it is the economic rather than the political performances that really count. Significant market moves caused by political machinations are better viewed as opportunities to add to holdings when pessimism is overdone or lighten up a little when optimism reigns supreme. In other words, as Ben Graham said, be guided by the stock market, but do not fall under its spell.
It is not only stock markets that shrug off elections over the longer term. As shown by the chart below, which covers periods all the way back to 1860, there is no statistical relationship between the performance of a 60/40 equity/bond portfolio in presidential elections years and those in non-election years.
Whilst the market may not be perfectly efficient, sources of inefficiency are rare, usually under the radar and eventually arbitraged away. A well-known, headline dominating event such as the US election process clearly falls outside that definition, meaning markets “price it in”.
Commentators may well attribute volatility to changes in the direction of policy but of course, they do so only with the benefit of hindsight. Market volatility is really caused by dozens, if not hundreds of factors. In fact, volatility leading up to and just after the election tends to be slightly lower than during other periods, perhaps because the market is getting closer to the result and the certainty it usually craves, whatever the outcome.
We have seen that the US election is not of primary importance for either equity or multi-asset portfolios. What about currencies, which should be more impacted by shifts in public policy and approaches to, say, government debt burdens?
As the chart below shows, it’s actually a similar story – the US dollar has not shown a consistent trend, either strengthening or weakening, in the period one month before or one week, month or quarter after the US election over the period dating back to 1984. That’s ten elections, covering both Democrat and Republican winners.
Again, this is because nearer-term interest rate decisions are far more important. Currently, the Bank of England looks poised to start cutting rates due to softening inflation and slower wage growth, which should weaken sterling. However, as US rate cuts will probably not be far behind, the impact of any UK rate cuts ahead of the US election is likely to be muted.
If you’ve read the earlier posts in this series, you can probably guess the answer – US elections do not tend to have a significant effect on gold’s performance, whichever party wins.
The chart below does suggest that gold does slightly better in the six months leading up to Republican win than it does when a Democrat takes office, but the six month period thereafter sees the reverse. Moreover, given the small number of observations and variability, the results are not statistically significant. Looking out over the full term in office, gold does not outperform consistently during the period depending who is in power.
Of course, maybe this time will be different, especially given the current extent of political polarisation and ongoing concerns over the escalating US debt burden. Given the stock market advances this year, now may be time to ensure that your portfolio also has robust longer-term hedges – a role that gold has traditionally played very well given its “safe haven” status. Just ensure that any allocation is made for reasons other than which party you think will come out on top in November.
The content of this document is for information purposes only. The authors believe that, at the time of publication the views expressed and opinions given are correct. No guarantee in performance of investment can be given to readers intending to take action based upon the content of this document. It is reminded that this document is a matter of opinion and any person wanting to invest in this market should first consult with the professional who can advise on their financial affairs. Any such investment will see your capital at risk, and you may get back less than you invest. Any companies cited in this report are used to support the view of the authors and should not be construed as recommendations to purchase or sell the underlying securities. Neither the publisher nor any of its subsidiaries or connected parties accepts responsibility of any direct or indirect or consequential loss suffered by a reader or any related person as a result of any action taken, or not taken in reliance upon the content of this document.
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