The Election Results Are in, but What About Equity Returns?

Written by: Mike Boyle | Advisor Asset Management

No “hanging chad” this year, but definitely lots of drama and a bit of a delay which of course seems par for the course given the year 2020 has been so far.

Currently it looks like the election results point to a victory for former Vice President Joe Biden, but this of course is barring any reversals after recounts in states with close margins and any substantive legal issues. Given this we have been inundated (both pre- and post-election) on what the outcome will mean for returns in the stock market.

Clearly there are many factors still at play, but we will try to look at prior outcomes to help us formulate a thesis moving forward. In doing this we went back 75 years (beginning in 1944) and looked at historical stock market returns (S&P 500) just after presidential elections. They are summarized below:

historical stock market returns

ource: AAM, Bloomberg data | Past performance is not indicative of future results.

The good news is, on average, the historical returns are all positive and the probability of a positive return are all well above 50%. However, the bad news is that all the historical total returns are slightly below the all-years average. Thus, in a nutshell, history tells us that total returns in the short term (one year and shorter) after a U.S. presidential election are good, but slightly muted when compared to non-election periods. The next big question we tend to receive is, “What about total returns for presidential terms broken down by political party?” These results are summarized below for the S&P 500:

Source: AAM, Bloomberg data | Past performance is not indicative of future results.

Just like above, a lot of good news. Eleven of the 13 administrations experienced positive total returns and 10 of 13 experienced double-digit total returns. Clearly these returns (whether good or bad) cannot be attributed to one individual or one political party, but we still feel it is important to detail these returns. It is also important to note that some administrations’ policies may have significant lag, and thus their effects (whether positive or negative) may not come to fruition until the next administration takes office.

Given all this historical data, it is also important to attempt to weigh the current situation in formulating a post-election outlook. Without a doubt, valuations are stretched but 3rd quarter earnings are currently coming in far ahead of predictions and are expected to grow 22.09% year-over-year. In addition, inflation is low and interest rates are currently near all-time lows. In fact, with the U.S. 10-Year Treasury Note currently yielding 0.77%, we show 67% of the S&P 500 currently carrying a higher yield (long-term average is 16%).

As always there are headwinds and hurdles, and first and foremost that means COVID-19. However, history tells us that past pandemics have eventually run their course and we are optimistic this will be the case again. Coupled with the high likelihood of post-election stimulus (regardless of who takes office) and we feel the prospects for equity returns, as history tells us, are positive in the near term. However, given the fact that we just had our best election week (7.32%, data from Bloomberg) in 75 years, we would expect those returns to be muted when compared to long-term averages.

Related: Time Is an Investor’s Greatest Asset