Investing for the next presidential cycle: macro trumps policy
Many investors distinctly remember the last presidential election night. Polling, political correspondents, and media coverage going into November 8, 2016, had all signaled that Hillary Clinton would likely win the presidency. Investors’ fear was that if Donald Trump won, there would be greater uncertainty and the markets would fall. After all, markets don’t like uncertainty.
Different policies, similar market results
Futures were volatile the night of the election, but since then, the S&P 500 Index has produced annualized returns of approximately +15%. These are impressive results given that the economic cycle was already advanced. With that said, it’s important to note that returns were similarly strong—with the S&P 500 Index up approximately 13%—under the Obama administration, but under much different policies. Key examples include regulation of the U.S. banking system (Obama implemented regulations, Trump rolled them back) and taxes (Obama raised taxes for top earners, Trump cut taxes for corporations and individuals). In addition, not only were U.S. equity returns strong in both periods, but the winners and losers by style, sector, market cap, and geography were remarkably similar.
In fact, in comparing performance across asset classes under the Trump administration versus the prior four years of the Obama administration, the leadership is nearly identical. Note that we included only the second Obama administration in the analysis so we could focus on a single market cycle—the post-global financial crisis recovery. At the top is technology, large-cap growth, consumer discretionary, healthcare, and U.S. equities. At the bottom is commodities, energy stocks, and international equities. How could this pattern have developed if the two administrations implemented such drastically different policies?
Low rates and easy money benefit growth over commodities
The answer is that the economic regime has been far more influential on market returns than the political regime. The past eight years have been characterized by several persistent economic trends: low growth (on a year-over-year basis, real GDP has averaged 1.90% and ranged from -9.54% to 4.15%), low inflation (on a year-over-year basis, core CPI has averaged 1.95%, ranging from 1.19% to 2.37%), and easy monetary policy (short-term rates have remained rangebound between 0.25% and 2.50%)¹. This type of macro regime benefits sectors such as technology, consumer discretionary, and healthcare, which offer more growth than the broader economy as well as pricing power; it’s less beneficial to commodity-producing companies such as energy and materials, which are seeing lower commodity prices. In addition, lower interest rates are a headwind to net interest margins for financials.
Some other asset classes are worth watching
With less than three months remaining until the 2020 presidential election, investors may be considering making asset allocation decisions based on the political regime they anticipate for the next four years. In our view, it’s more effective to consider the macroeconomic environment in determining where to invest. As found in our global market outlook, Market Intelligence, we don’t believe a major regime shift is under way, but there are asset classes that offer value and catch-up potential. U.S. mid caps, international growth, and U.S. value look compelling to us as satellites around a U.S. quality core.
1 FactSet, 11/30/12-6/30/20.
The S&P 500 Information Technology Index tracks the performance of those companies included in the S&P 500 Index that are classified as members of the GICS information technology sector. The S&P 500 Consumer Discretionary Index is a capitalization-weighted index considered representative of the consumer discretionary market. The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States. The S&P Health Care Index measures the performance of the health care sector of the U.S. equity market. The S&P 500 Utilities Index tracks the performance of companies in the S&P 500 Index that are primarily involved in water, electrical power, and natural gas distribution industries in the United States. The S&P 500 Communication Services Index comprises those companies included in the S&P 500 Index that are classified as members of the GICS communication services sector. The S&P 500 Materials Index comprises those companies included in the S&P 500 Index that are classified as members of the GICS materials sector. The S&P 500 Industrials comprises those companies included in the S&P 500 Index that are classified as members of the GICS industrials sector. The S&P 500 Consumer Staples comprises those companies included in the S&P 500 Index that are classified as members of the GICS consumer staples sector. The S&P 500 Financials Index tracks the performance of publicly traded large-cap financial companies in the United States. The FTSE NAREIT All Equity REITs Index tracks the performance of tax-qualified real estate investment trusts (REITs) in the United States with more than 50% of total assets in qualifying real estate assets other than mortgages secured by real property. The MSCI All Country World Index ex-U.S. Index tracks the performance of publicly traded large- and mid-cap stocks of companies in 22 developed markets and 23 emerging markets. The S&P 500 Energy comprises those companies included in the S&P 500 Index that are classified as members of the GICS energy sector. It is not possible to invest directly in an index.
The opinions expressed are those of the author as of 8/21/2020, and are subject to change. No forecasts are guaranteed. This article is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index by John Hancock Investment Management Distributors LLC, John Hancock Investment Management LLC, and their affiliates.