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.

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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?

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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.