Election gurus don’t know who is going to win the presidency in 2020 any more than you do. And even if they did, it would tell you nothing about the stock market.
As the Democratic primaries take off, stock market prognosticators are handicapping the race for the White House. Will Mike Bloomberg be good for stocks? Will Sen. Amy Klobuchar or Joe Biden?
Superficially, it sounds compelling. Bloomberg certainly made a ton of money in Bloomberg LP, the software and media firm that catapulted his political career.
More broadly, Bloomberg cares about business. Like Klobuchar, Biden and others in the dwindling breed of Democratic moderates, they’ve refused to sign on to the progressive drumbeat demonizing corporations.
Here’s some advice: If anyone says a particular candidate (including President Donald Trump) will be good for your portfolio, head for the hills.
Election gurus don’t know who is going to win any more than you do. And even if they did, it would tell you nothing about the stock market.
The most pro-free-enterprise president — a businessman himself — in recent memory, was George W. Bush. Oops. By the time he left office in 2009, the market (as measured by the Dow Jones industrial average, as throughout) had tumbled 26%. Barack Obama, Bush’s successor, had never met a payroll and was not above saying unkind things about CEOs. He was loathed by investment managers, and some of them still gripe to me that he was a socialist. Kind of ungrateful, I would say, because under “Comrade Obama” the market vaulted 148%.
Bush and Obama each had to deal with the fallout from the mortgage bubble, and their policies weren’t much different. Each supported federal bailouts of banks and automakers, and each supported ultralow interest rates and higher capital ratios for banks. Although Bush’s rhetoric and inclinations were far more conservative than Obama’s — no one dreamed that Bush would be investing federal money in private banks — the policies of each were determined by an unforeseen event (the crash), which mattered more than where they stood on an ideological spectrum.
Candidates’ political leanings rarely translate neatly into policy. Some presidents do stuff that seems “anti-business” (such as George H.W. Bush’s 1990 tax hike) that helps the economy in the long-term. Sometimes free-enterprise types, like the elder Bush, are forced by a crisis to intervene. And sometimes, once in office, they discover an unknown affection for big government, a la Richard Nixon, who started his career on the far right and as president in 1971 imposed wage and price controls.
Historically, there is no correlation between a successful candidate’s pro-business sentiments and subsequent market performance. You could even argue there is a negative correlation, because over the past century (not counting 2020), the market has risen 14.4% per year in the 48 years when Democrats were in office, and 10.1% during 51 Republican years.
There are two reasons for the disconnect. First, the four-year presidential term is unrelated to the business cycle. Gerald Ford, who succeeded Nixon in 1974, didn’t accomplish much, but he had the good fortune to enter office at the trough of a recession. Result: The Ford market rose 40%. Calvin Coolidge was way luckier. He exited the stage in March 1929, just months before the Great Depression. Coolidge investors earned 230% but — honestly — how many of them got out before the following October?
Second, and more importantly, stock prices respond to variables that are only marginally under presidential control. This was extremely fortunate for investors during the golden era of Warren G. Harding, whose administration was rocked by a recession and the Teapot Dome scandal, and who nonetheless gifted investors, in its brief two years, with a positive 23% return. Perhaps in the 1920s, Democrats were confused that the market rose under Harding — a genial mouther of platitudes and not much else.
The dirty secret is that the market is not a referendum on presidential policies, nor on presidential character. Many in my bluest-of-blue neighborhood in Cambridge, Mass. have wondered, “If Trump is so awful, why doesn’t the market care?”
The market is not a retributionist god who punishes narcissistic tweeters. It does not punish the profligate or (except very rarely) the reckless. It is not a barometer of morality.
It does not reward you for being right on Iraqi airstrikes; by the time the aircraft have returned to base, traders are on to something else. And the market does not conform to a political narrative – nor to any narrative. It is not a stage on which, finally in Act 3, some hidden truth emerges and the guilty are punished. Trying to discern such a narrative is not a fruitful way to invest.
Stocks, simply, are discounting machines; they put a present value on future earnings. Overwhelmingly, stock prices respond over longish periods to two variables, earnings and interest rates. No one who invested in Microsoft when it went public in 1986 says, “Thank God, I invested under Ronald Reagan.” No offense to “the Gipper,” but he had nothing to do with it.
Microsoft’s earnings have consistently risen over three-plus decades. That’s why the stock had been a home run. Like every other investment, it has also benefited from steadily falling interest rates. (The lower the rate, the greater the present value of future earnings.)
What happens to earnings and interest rates will be more important, if you’re viewing the election through a mercenary lens, than who wins Iowa in the Democratic caucuses on Feb. 3.
Investing truths are always easier to see on a smaller scale. If you were thinking of putting money into a new business – maybe a friend has an app – you wouldn’t say, “Let’s wait for Iowa.”
Whether that app succeeds will not depend on the election. It’s not much different for big corporations. If they do a good job selling products and staying ahead of the competition, and if you don’t pay a crazy price for them, you’ll do OK.
Of course, presidents have some effect. The Trump tax cuts provided a one-year boost, but they were offset by the disguised tax of the Trump tariffs. And be careful about crediting a particular president for policies that might have happened anyway. Before Trump, quite a few Democrats (Obama included) supported a corporate tax cut. Going forward, there is less support for unbridled capitalism and global trade than in a long time. Both parties have turned populist, which will be true no matter who wins.
Sen. Bernie Sanders, a Democratic Socialist, scares a lot of people. He scares me, too. But the party is tacking left. Biden, the front-running moderate, and Sanders both support an increase in public health-care benefits, an increase in the minimum wage to $15, some years of free college and an increase in the capital gains tax. There are important differences, but four years from now, they are likely to be overwhelmed by events we can’t predict.
Something will happen to jolt the market in the next term (it always does). And the president, whoever it is, will have to respond. In the next term, as wages continue to rise, the Federal Reserve will worry more about inflation than many people now realize. That will put pressure on interest rates. And stocks will start the term (assuming there is no break first) in nosebleed territory (24.6 times earnings).
So I would pay attention to prices and earnings, and, when it comes to your portfolio, ignore the polls. If we elect a good person for the country, the market will do fine, or as well as it can. If you are still hooked on a pro-business candidate, remember: The most pro-business, and indisputably the most prepared, candidate ever elected was a millionaire former mining executive and secretary of commerce. His name was Herbert Hoover.
Roger Lowenstein is a financial journalist and writer. He wrote this for The Washington Post.