US Presidential Elections and the Equity Market
Investors around the globe are faced with lots of news flow in 2016 and no sooner will the EU Referendum vote be completed in the UK than all eyes will turn across the Atlantic. By the start of 2017 (the 20<sup>th</sup> January to be precise) there will be a new US leader and it seems as though we are now close to arriving at the nominated Democrat and Republican candidates for the November elections.
Despite the fact that Bernie Sanders claims he is still in the race to be the Democrat representative, Hillary Clinton will become the first ever woman to be a major party Presidential candidate. Her supporters argue she has unparalleled qualifications for the job after a lifetime in public service in which she has served as first lady, New York senator and secretary of state under Barack Obama. President Obama, who defeated Clinton’s first bid for the Democratic nomination in 2008, is widely expected to endorse Clinton in the coming days.
The Republican candidate will be Donald Trump and quite frankly his campaign developed such momentum that he moved from being a rank outsider to a credible winner of one of the most protracted election campaigns in the world. Trump’s core policies are hard to tie down and he can be contradictory in his views and has indeed changed his mind several times. He is often described as a populist and wants tax cuts and a balanced budget with no reductions in key areas such as healthcare.
Remember that the Electoral College drives the Presidential outcome and the popular mandate has been reflected successfully in 48 of the 52 elections. A state's number of electors equals the number of representatives and senators the state has in the United States Congress. In the case of representatives, this is based on the respective populations. Each state's number of representatives is determined every 10 years by the United States Census. The candidate who receives a majority of electoral votes (270) wins the Presidency. The number 538 is the sum of the nation's 435 Representatives, 100 Senators, and 3 electors given to the District of Columbia.
The 2016 Republican National Convention will take place from July 18 to 21, 2016, in Cleveland, Ohio while the 2016 Democratic National Convention will take place from July 25 to 28 in Philadelphia, Pennsylvania. This will be followed by both candidates’ criss crossing the nation in expensive extravaganzas to win the State vote.
Hillary Clinton and Donald Trump clearly dislike each other, with Clinton calling him ‘temperamentally unfit’ to be President and argued that his claim to make America great again, was code to actually take America backwards. He is certainly Protectionist in some of his views. Similarly, Trump has attacked Hillary and her husband, former President Bill, as prime examples of ‘turning the politics of self-enrichment into an art form’.
The election will come against an important backdrop with the US economy in the latter stages of one of the longest economic cycles in history. Despite the full employment situation, unemployment is now down to 4.5%, real incomes have been falling across most income bands for the last fifteen years. There is a widespread feeling that both parties want to introduce some form of minimum wage increase. The Federal Reserve have only moved once in tightening interest rates and keep holding off, far longer than the market previously expected. Although, the cessation of Quantitative Easing, has actually created a significant amount of ‘shadow’ tightening. Despite the fall of the oil price in the last 18 months very few of the benefits have flowed into increased consumer spending. There are signs that the ultra- low yields are forcing people, notably in the older age groups, to dramatically increase their savings rate.
Equity returns during presidential election years have been on par with long-term averages so there is no obvious historical trend of higher or lower stock market performance during presidential election years, despite the uncertainty of a potential transition of political power. Clearly the economic conditions prevailing at the time will have a significant impact, with positive conditions supporting the incumbent party. Many observers believe that the actual impact on sectors is overall neutral, although Healthcare has been weak. This was a reaction to Hillary Clinton outlining plans to reduce drug prices. Volatility can then develop in the first year following an election, as the market digests change, and then gradually increases to its peak in the second year of the cycle.