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Institutional Perspectives

Historically, the U.S. stock market seems to prefer a divided government, but that doesn’t necessarily mean it welcomes a stalemate.

We wish we had a crystal ball and could answer the many questions we have been receiving on the potential market impact of the U.S. presidential election on November 3, 2020. As the date draws nearer, and candidates and their positions are better known, we will, from time to time, provide perspective on the policies that are likely to affect the sectors and asset classes that are part of our investment strategies. Times of political transition typically offer both risks and opportunities in our business.

Until then, only history can be our guide (and one thing we know for certain is that past performance does not guarantee future results!). Table 1 looks at the political demographics of 35 post-World War II U.S. federal government elections and their impact on the broad U.S. stock market, as represented by the S&P 500® Index.

Although we make seven observations on the historical results, we offer an important caveat: We would not predict anything based on this history because none of the data control for any of the fundamentals that actually drive returns, such as earnings expectations and surprises, inflation expectations and surprises, yield changes, and other factors.

 

Table 1. Historical Impact of Elections on the S&P 500® Index
Real returns on the index, based on 35 post-WWII U.S. federal government elections

Source: uselectionatlas.org and Lord Abbett.

 

Seven Observations

1)  The U.S. stock market has tended to outperform after elections. This is in comparison with both the period before the election and the long-term average.

2)  This post-election outperformance followed off-year elections. Comparatively, the market has underperformed after presidential elections.

3)  The underperformance after presidential elections may be due to the fact that five out of 17 (29%) cases were associated with recessions (1948, 1952, 1980, 2000, 2008). Three out of 17 presidential elections had recessions in the preceding year (1960, 1980, 2008).

4)  The market has underperformed long-term average returns in periods of comparable length before elections.

5)  Elections that resulted in divided government—at least one out of three of the president, Senate, and House are in the hands of one party and the other two are in the hands of the other—had the best returns both before and after.

6)  Elections that resulted in a change in composition by party, undivided Republican, or undivided Democratic control tended to be preceded by underperformance.

7)  Elections that resulted in undivided Republican control have tended to be followed by underperformance in the three- and six-month periods immediately afterwards but have delivered the best average returns in the subsequent 12 months.

Note that the market performed slightly less well before and after elections that resulted in undivided Democratic control (11) than before and after those that have resulted in undivided Republican control (5).

 

Giulio Martini and other Lord Abbett experts will tackle next year’s U.S. presidential election and other key topics during our 2020 Investment Outlook Webinar on January 8, 2020. Register now.

 

However, the number of cases is small for each outcome and there are no fundamental controls applied to the results. So, in our opinion, extrapolating from them can only be done with extremely low confidence.

It’s often remarked that the market likes divided government and, based on our Table, that’s been true.

But, in our opinion, we shouldn’t conclude that the market has outperformed after such elections because it welcomes a stalemate (which is sometimes the result) or relative inaction on the part of our elected officials.

Divided government more often results in compromise—which can be a good thing—on issues such as taxes, federal spending, and infrastructure. As these and other problems seem to be getting larger, we believe the incentive to compromise might be stronger when both sides have a say in how they are resolved.

As we noted earlier, we will be offering periodic commentary and analysis on election-related topics as the U.S. campaign unfolds. We will be keeping a close eye on developments along the way. 

 

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education.  No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein.   If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in Market View are as of the date of publication and are subject to change. Additionally, the opinions may not represent the opinions of the firm as a whole. The document is not intended for use as forecast, research or investment advice concerning any particular investment or the markets in general, and it is not intended to be legal advice or tax advice. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.

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