Should the balance of power in Washington matter to investors?
Oct 16, 2024
Investors may be contemplating how financial markets could be affected by the outcome of the election as we head down the home stretch to November 5. There are plenty of important election-related questions—on the potential impacts of competing tax policies, for example—and about which party will end up controlling the White House and Congress.
We make no claim to be professional election handicappers or poll readers, but fortunately there’s a wealth of information available to form a consensus outlook, even if it’s inconclusive. As it stands today, the White House and the House of Representatives appear to be toss-ups, while Democrats look likely to lose control of the Senate given the high number of seats they hold that are up for re-election in this cycle.
How have U.S. equities performed under different government control scenarios?
Investors are contending with an admittedly low visibility forecast for the federal government’s future balance of power. However, they may find more encouragement in the historical track record for U.S. equity market performance under various government control scenarios. Analysis of the period from 1936 through 2023 shows1:
- The best performing periods—with an average annual S&P 500 return of about 16%—have coincided with Democrats in the White House and split Congressional control (that is, one party controlled the Senate and the other controlled the House of Representatives).
- Performance was very similar during the second-best scenario, which again places Democrats in the White House while Republicans controlled both Congressional chambers.
- Republican control of the White House with a split Congress came in a close third with roughly 15% average annual performance.
- Unified control coincided with a step-down in returns. Democrats presided over modestly better performance than Republicans, although average annual performance was close to 12% under both scenarios.
- The configuration with the lowest historical performance coincided with Republicans in the White House and Democrats controlling Congress. The 9% average annual return under this scenario was certainly still adequate, and it increases to 10.7% if we exclude 2008 to account for the impact of the Global Financial Crisis (GFC).
Is it a four-year phenomenon or a focus on fundamentals?
Performance ranging from roughly 11% to 16% across all scenarios, excluding the GFC, strikes us as a narrow range of outcomes. We believe this implies investors should avoid drawing too much direction from the composition of control in Washington when we learn more about election results in the coming weeks.
In our view, U.S. equity performance is likely less attributable to government control than to other more important fundamental factors.
Exhibit 1: Investment performance has a stronger association with valuations and policy rates than balance of power
Calculated using January month-end data for closest available alignment with inaugurations. S&P 500 return for 2021 is calculated through September 2024. Sources: Robert J. Shiller, Board of Governors of the Federal Reserve System
Looking back at presidential administrations over the last five decades, the best four-year performance periods were divided evenly between split and unified balance of power scenarios. The same goes for the worst periods—and we note that the two most negative performing timespans coincided with major crises and recession periods. The underlying growth of the economy matters more for markets than election outcomes.
Our general observation is that the periods with the best performance share either attractive-to-fair valuations (as exhibited by the P/E ratio at the beginning of the presidential term), accommodative central bank policy (as shown by the fed funds rate), or relatively balanced levels across both metrics. Of course, the direction of travel for these metrics during the intervening timeframes and the influence of crisis-era conditions on subsequent periods also have significant impacts on investment performance.
Lastly, remember that equity markets reflect expectations. This means investors incorporate information about future economic conditions into their decisions about where equity prices should be today. As a result, we tend to see equity market developments lead the economy by approximately six-to-nine months. Therefore, investors should keep in mind that market performance during a given timeframe can be a poor proxy for concurrent conditions.
We thank Alex Chown, Senior Research Analyst, for his contributions to the preparation of this article.
1. According to data from BofA Global Research, Bloomberg and FactSet
Key Takeaways
Important Disclosure
This communication is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.
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