Despite the broad market rebound in the 2nd and 3rd quarters, many investors are still feeling uneasy. While the recovery has been welcome, the weakened economy and rolling business restrictions are causing investors to wonder if markets are truly reflecting all the uncertainty that 2020 has produced. Further, we are entering an election season amid rising expected market volatility.
Many questions center on the outcome of the presidential race and control of the Senate. We know that policy will have effects on economic incentives, business creation, and asset valuations. Historically, though, throughout several administrations and changes in control of Congress, average market returns have been fairly similar. The chart below shows average and median returns of the S&P 500 index for all combinations of White House/Senate/House control and the number of years for each combination.
All combinations have produced statistically similar returns with one outlier, RDR, which only occurred in 2001 and 2002 as the dot-com 2000 bubble was bursting. There were also no patterns we found when looking at average returns in presidential election years or the following years relative to all years. As such, we don’t think an election or party control should dictate how investors are positioned in portfolios with long-term goals.
However, we should be aware of candidates’ plans and specifically how they might impact our portfolios. For instance, former Vice President Biden is proposing to raise the corporate tax rate. It has been estimated that, all else being equal, that this would reduce earnings on the S&P 500 index somewhere between 10% to 15%.1 If enacted, the market would have to account for this decrease. The market will likely begin factoring in potential changes in policy when the likelihood of the changes actually being enacted is clearer.
However, as usual, there are many other variables at play. An effective vaccine allowing for households to re-enter workforces and increasing spending due to deferred consumption could more than offset that decrease.
While 2020 has had more than its share of uncertainty and most of us can’t wait for this year to end, the reality is all years have multiple variables that can affect markets. Uncertainty is ever present. As we’ve said, one way to deal with the uncertainty is to ensure your asset allocation to more conservative assets is sufficient should potential risks materialize into real events. If you have any questions, please contact your financial advisor.
1. CNN Business (06/10/2020): Biden wants to undo Trump’s tax cuts. That could rattle Wall Street.
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
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