Different Makes a Difference^®

Conventional Political Wisdom is Often Very Wrong About Stocks

When it comes to the 2024 U.S. presidential election, there is only one thing we can confidently proclaim: Watching the race will be exhausting and nauseating given the extent of political polarization in America.

We are not going to place odds on a Joe Biden or Donald Trump victory for two reasons. First, we simply don’t know who will win. Second, and more importantly, knowing the answer wouldn’t make us any wiser or confident in predicting the outlook for the economy or markets.

At the 2024 Odlum Brown Annual Address we referenced the 2016 presidential election as an example of the perils of forecasting. Not only did Donald Trump win that election, despite a nearly unanimous belief that Hillary Clinton would become president, but stocks went up, way up, even though most believed Trump would be a negative for the market. In fact, U.S. stocks returned roughly 25% in his first year and 70% over his four-year term. The conventional political wisdom doesn’t always translate accurately in the stock market.

Many believe Republican presidents are better for the market, yet the S&P 500 Index has compounded at a 15.1% annual rate since Biden, a Democrat, was elected. That is better than the 14.3% annual gains during Trump’s presidency. Stocks have done slightly better under Democratic administrations over history, but the margin has been too slim to consider it important. Other factors matter more.

Some would say Democrats care more about climate change and the environment, and that Republicans are more supportive of traditional oil and gas. Yet, oil and gas stocks averaged an annual loss of 19% during Trump’s time in the White House versus annual gains of more than 50% under President Biden. The iShares Global Clean Energy EFT appreciated at a 26% annual rate under Trump and has dropped at a 9% annual pace since Biden took over.

Given that Democrats are seen to favour tough financial market regulations, one might assume bank stocks would have performed better when Trump was leading the country. Not so. The S&P 500 Bank Index has grown at a compound annual rate of 16% during Biden’s presidency, three times the 5.4% annual rate when Trump governed.

Republicans are supposed to be bigger defense spenders, yet the 6.9% compound annual return for the S&P 500 Aerospace Index during Trump’s presidency is a fraction of the 16.1% annual appreciation since Biden took office.

The bottom line is, there is much more to the market than politics.

Most of the time, economics drive politics, not the other way around. If the economy is strong, odds are better that the incumbent will win another term. If the economy is weak, change is more likely.

While politics and government policies matter, they must be considered alongside many other important factors.