Kevin Greenard: The past 100 years of presidential elections provide interesting data

In terms of its importance to world markets, the U.S. election is far more important to follow than our own Canadian elections. The United States represents 57 per cent of the world's market capitalization while Canada represents less than thee per cent. Our clients hold more U.S. and international investments than Canadian investments. It is crucial in terms of stock market analysis to be hypersensitive to the news south of our border as we approach the next election on Nov. 3, 2020.

Leading up to the last election in November 2016, we fielded many phone calls and had many meetings about the direction of the stock market under both a Republican and Democratic election outcome.

Most Canadians I talked to felt that there was no way that the Republican candidate would get elected. At that time, I remember telling people that it was a real possibility that the Republicans would get elected. I lived in the United States for many years, and it became very apparent that Americans support a political party first and foremost. I have not felt that attachment to a political party is as strong here in Canada. Many Canadians may have a bias, but they are open to hearing what each candidate says.

What was also very clear in the last U.S. election was that polls are not always right. Leading up to the last election, polls were largely predicting a Democratic victory. When this was not the outcome, the initial first couple of hours of trading on the morning of Nov.r 9, 2016 was a panic reaction with a sharp sell off on the New York Stock Exchange. But by the end of the day, the markets had actually closed higher.

S&P 500 stock market returns during election years

Source: Bloomberg

* Price Returns are in USD

** Information not available

*** R = Republican; D = Democrat

Over the years, many articles and theories have been put forward regarding the stock market in relationship to presidential four-year terms. Certainly, lots of historical data exists on how the stock market typically performs in the first, second, third, or final year of a president's term. Generally, the final two years are better than the first two years. The above shows that, in the past 24 election years, the S&P 500 was positive in 20 (or 83 per cent).

We caution all investors not to rely on historical data such as this to make investment decisions. Although the odds may lean toward these patterns continuing, it's not a sound way to make investment decisions.

The purpose of this article is to give a few statistics as an additional factor to consider when making investment decisions. There are too many other factors to consider in putting all the emphasis on historical patterns.

As a portfolio manager, I think it is important to have an opinion on different topics, such as real estate and politics, if clients ask. Most of our clients, over the last three or four years, have asked for my comments about President Donald Trump. In answering this question, I feel I need to wear two hats, or have two answers. One involves my opinion as a portfolio manager, and the second my opinion as an individual and father of two children.

Trump often measures his success against how well the stock market has performed. In his initial campaign, he focused on certain economic policies. Some of his decisions with respect to trade protectionism and immigration were not necessarily good for the stock market. Other decisions he made have been positive for the stock market, at least in the short term. Below are a few examples.

Trump held no previous political office before this appointment, and he has a natural dislike for regulations. One of his campaign promises was the repeal of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

This act was passed into legislation in 2010, under the previous Democrat administration, largely to prevent another financial crisis, as occurred in late 2008 and early 2009. In 2018, a bill passed that largely rolled back the main components of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This has been replaced with the Economic Growth, Regulatory Relief, and Consumer Protection Act.

In our opinion, greater care has to be taken by individual investors to monitor the situation and to always be in a position to react quickly.

The previous Democrat administration introduced environmental policies and regulations to help reduce carbon emissions. Protecting the environment has not been a priority for Trump's administration when compared to previous administrations.

In both his campaigning and immediately upon taking office, the president began to implement his "America First Energy Plan.” The plan was to expand the development of low-cost fossil fuels within the U.S. The idea was to work on drilling and extraction jobs and to achieve energy independence.

His administration also wants to revive the coal industry. This plan essentially reverses all the work of the previous administration's climate action plan.

Trump announced that the United States would be exiting the Paris Climate Agreement. He also signed a bill reducing the disclosure rules on energy companies. While investors today may make more profits by investing in companies with fewer environment policies and regulations, unfortunately, future generations will be affected even more than our generation by environment decisions (or lack thereof) made today.

Government debt should also be an area of concern for investors. Approximately 10 years ago, the public debt of the United States was about $11.9 trillion. At the end of 2019, the public debt of the United States was about $22.7 trillion. In less than a decade, the debt has nearly doubled. This is an astonishing increase that should be of concern.

The common measure of success of an administration is often, unfortunately, based on immediate satisfaction, such as the stock market, job numbers, Gross Domestic Product (GDP), and other measures that are often short-sighted.

Breaking down GDP, it is normally calculated by adding items such as personal and public consumption, public and private investment, and government spending. It seems a little misguided to look at GDP too closely and ignore government debt. When I talk to clients about this, the reality is that if a government is choosing to spend money, and go into further debt, this normally stimulates the economy which in turn is normally good for the stock market in the short term.

However, in my opinion, politicians who focus only on today, by running large deficits, are doing so to stay in power and ignoring the long term consequence of throwing future generations under the bus.

As a portfolio manager, it typically makes sense to stay invested, in the short term, if governments are stimulating the economy and running large deficits. At some point this can't continue. For today, the public debt keeps getting swept under the carpet.

The Federal Reserve chairman has several responsibilities, including promoting the goals of maximum employment, stable prices, and moderate long-term interest rates. The current chairman, Jerome Powell, was appointed by Trump and confirmed by the Senate.

The chairman is supposed to be independent. The chairman adjusts interest rates to smooth out economic cycles-not to create one big boom cycle. The challenge is that when rates are already near historic lows, then monetary policy becomes less effective in the future if they have little room to move lower.

It is largely known that presidents who want to focus on getting re-elected will pressure the Chairman to lower interest rates. Ever since Trump appointed Powell, he has been pressuring him to lower rates to stimulate the economy.

Typically, interest rate cuts make it easier for corporations to borrow money, which also makes them more profitable. Investors who have historically invested in bonds or GICs may have to move more into lower risk equities to get a return greater than inflation. So, when interest rates are pushed lower, the stock market usually moves upward and it is a stimulant for the economy. As a portfolio manager looking at the current situation, it is normally recommended to stay invested if rates are going to be pressured lower still.

2020 will be an interesting year with the next U.S. election. One thing for sure is that you'll want to keep a close watch on the markets - both before the election and after.

Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250-389-2138. greenardgroup.com