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US election – will Biden or Trump be better for stock markets?

We look at the history of stock markets under the Republicans and the Democrats, and what a Biden or Trump win could mean for investors.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

With the US election imminent we’ll soon find out whether Donald Trump or Joe Biden will be in the White House for the next few years. The US president is arguably the most powerful person in the world and, in theory at least, can have a major impact on the economy and the stock market.

The president sets taxes (with the approval of Congress), spending and, to a large degree, the regulatory position of the government. That’s as well as the response to crises like the ongoing pandemic. All of these are relevant to companies and therefore markets.

Donald Trump has certainly been willing to take credit for bull markets during his time in office. But is the president’s political colour as important as it seems?

What does the data tell us?

The chart below shows the performance of the US stock market, including dividends, since January 1974. Nixon was in his final year in office, about to be replaced by Ford after the Watergate scandal.

During this period the market returned an average of 15.4% a year under Democrats and 8.6% under Republicans. Case closed, right?

Chart showing US stock market performance

Past performance isn’t a guide to future returns. Source: Refinitiv Datastream, HL calculations, 22/10/2020.

*Logarithmic return helps us analyse markets over a long period of time because it takes in to account compound growth. We've used logarithmic returns to show performance without compounding, keeping each year in proportion.

Not so fast. The Republicans have been held back by George W. Bush’s time in office between 2001 and 2009. Bush entered office just as the Dot Com Bubble was bursting, while Clinton presided over its inflation. It seems unfair, therefore, to give Clinton the credit for the run up and stick Bush with the blame when the bubble popped.

Additionally, Bush left office in January 2009 – just as the market was nearing its lows after the Financial Crisis.

How much Bush should be blamed for the Financial Crisis is a debatable point. For example, the Glass-Steagall Act, which separated investment banks from their commercial counterparts, was effectively repealed under Clinton in 1999. Some economists think this may have contributed to the crash, though this is hotly contested and the consensus seems to be that it was at most a minor factor. Our point is that the roots of the crisis run deep, and it’s unsafe to assume that a Democrat would have avoided it.

These are, in large part, political debates. Like sports fans, both sides want to talk up their guy and blame problems on the other side. It makes getting to the truth difficult.

Regardless, if you remove Bush from the analysis the two parties are almost neck and neck. Republican Presidents (excluding Bush Jr) have presided over annualised stock market returns of 14.1%.

If just one president skews the entire analysis we should question the validity of the whole exercise. Presidents, it would seem, don’t influence the direction of the US stock market all that much, or at least not predictably based on their party loyalties.

What about UK investors?

The picture is more complicated for UK investors. This is largely because the relative strength of the pound and dollar have a significant impact on your eventual returns.

The graph below shows the performance of the market, except it’s shown in pounds and adjusted for inflation – that’s just the general increase in prices over time. It also includes the pound vs the dollar in navy.

Chart showing US stock market and the British Pound

Past performance isn’t a guide to future returns. Source: Refinitiv Datastream, HL calculations, 22/10/2020.

When the pound gets weaker investments in dollars get more valuable, because if you sold them you could buy (and then spend) more pounds.

For example, look at the market under Carter (the first blue section). In the previous graph it showed steady, if slow, growth. But in pounds and adjusted for inflation investors actually lost a considerable amount of money.

Likewise Reagan gets a significant boost towards the beginning of his tenure from a falling pound.

So if making investment decisions based on which party controls the White House looks silly for a US investor, it makes even less sense for a UK investor.

All investments will fall as well as rise in value, so you could get back less than you invest. Past performance isn’t a guide to the future.

So who’s going to be better for markets, Trump or Biden?

Almost no one likes paying taxes, as evidenced by the lack of voluntary donations to HMRC. Biden is planning to raise both corporate and personal tax rates, although he says only the wealthy will pay significantly more.

By comparison Trump has cut taxes, which had significantly increased the budget deficit even before COVID-19 hit. Trump has also been cutting regulations left, right and centre, which many on the right think hold back growth in the economy.

On the face of it, one might think Trump would be better for markets. But markets also like stability. That probably isn’t the first word that comes to mind when you think of Trump, but is a key part of Biden’s pitch. Furthermore, Obama presided over a strong stock market recovery after the last global crisis with Biden at his right hand.

Ultimately, we think investors should focus on the quality and valuation of their investments, not who’s in the White House. Remember, making sure you’re diversified is the best way to shelter yourself from any unforeseen events.

This article is not personal advice. If you’re not sure if a certain action is right for you, then you should ask for advice.


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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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