President Biden’s first year (first term) far surpassed every president since 1932, with a gain of +38.3%. As the post-pandemic stimulus ended, inflation soared, and the Fed began implementing quantitative tightening, markets have struggled. Nearly two years after being elected, those gains have been more than halved to just +14.9%; he now ranks 13th out of the previous 15 presidents.
History shows that markets have tended to perform better under Democratic Presidents than under Republicans (ignoring control of the House and the Senate).
While Presidents are always quick to take credit for strong performance and quick to blame their predecessor for poor performance, history indicates that they are likely responsible for neither. In aggregate, over the last 90 years, markets have gained:
- 370% under Republican Presidents
- >724% under Democratic Presidents
- >53,000% over the entire time period
Richard Flynn, UK Managing Director at Charles Schwab, said: “Two years since Biden’s election victory, equity markets have fallen back from the exceptional gains seen during his first 12 months in office. For the S&P 500, the massive fiscal and monetary stimulus unloaded during the worst phases of the pandemic boosted corporate revenues. But the bill is coming due. Based on the plunge in the Conference Board’s CEO Confidence, the risk of recession is high, and earnings are in danger of moving into negative year-over-year territory before long.”
Flynn says the most important messages from the third-quarter earnings season are weakening demand, high production costs including labour, the effects of the strong US dollar and the impact of the Fed’s aggressive rate hiking cycle. Of note is the breadth of hits in terms of industries – with not only technology feeling the pressure, but also housing, autos, communications – and especially those segments of consumer and retail that were the biggest beneficiaries of the stimulus-fuelled early stages of the pandemic.
Asset owners are now feeling sharp pain from the “everything” bear market, while most consumers’ spending power has dwindled under persistently hot inflation.
“For investors, more often than not, it is beneficial to consider macro conditions and their ability to hold more influence over the market, as opposed to specific legislation or policy. It’s always difficult to tie any legislation directly to economic and market outcomes,” Flynn said. “The underlying macro and micro forces at work are much better explainers of stock prices and the trajectory of the economy. In current conditions, investors should stick to diversification and rebalancing within financial plans.”
Things to bear in mind heading into the mid-terms
- Control of Congress as well as key state and local offices are up for grabs this week.
- Current polling indicates the Republicans will retake control of the House of Representatives but the Senate is a coin toss. A divided government can be good for the market.
- Now is not the time to take undue risk, and investors should seek out high-quality segments of the stock market with strong balance sheets, positive earnings revisions, and healthy profit margins.
- While the outlook may appear bearish, the long-term trend shown in recent Charles Schwab research is that the strength of the US economy has delivered exceptional returns for investors.
- The S&P Index has surged more than 53,000 per cent in the past 90 years.
