In the September 2020 video market update, Derek Kravitz, Investment Analyst, takes a look at what the election results could mean for the stock market.
September Stock Market Update Transcript
Hi, everyone. This is Derek, the investment analyst here at Financial Services Advisory, here with your September, 2020 market update. In this update, we’re going to discuss the upcoming presidential election on November 3rd. Given everything that has already happened in 2020, it may seem like the market has completely forgotten about another major event looming on the horizon, which is the US presidential election on November 3rd, only a few short weeks away from now.
Now that the major party conventions are behind us, we have established with certainty that the incumbent President Donald Trump will be the GOP for the Republican Party’s nominee for president, while Joe Biden, the former vice president, will be the Democratic Party’s nominee for president. In addition to the presidency, there’s also 35 Senate seats up for election and all 435 seats in the House of Representatives, making this a major important election.
First let’s examine what a potential re-election of Donald Trump would look like. Back in 2017, President Trump’s Secretary of the Treasury, Steven Mnuchin, said on a CNBC interview that the administration sees the stock market as a report card. Given that President Trump has also himself referenced gains in the stock market under his tenure frequently, I think it’s safe to say that if he is re-elected, market funding policies will continue to be pursued. So far under his tenure, up through the end of August, 2020, the stock market has gained about 65% since his inauguration. If President Trump is re-elected, that does not necessarily mean that the stock market must cooperate. One must look no further than former Republican President George W. Bush. We saw his second term witness a stock market decline of about 26% leading into the great financial crisis.
Now let’s take a look at what a Biden administration might look like for the stock market. The former vice president has made no secret of his intent to raise taxes on America’s highest earners as well as reversing parts of the corporate tax cuts passed in the Tax Cuts and Jobs Act of 2017. However, Mr. Biden is unlikely to achieve this feat if there is not also a simultaneous takeover of the Senate by Democrats, along with a hold on the current Democratic House of Representatives. This would be known as a Democratic sweep, and it is certainly a possibility this year as the Senate map is particularly challenging for Republicans as they are defending 23 seats to the Democrat’s 12.
So what can history tell us about potential outcomes this year? Well, according to Ned Davis Research, 80% of the time when there’s been a recession in an election year, the incumbent has lost their bid for re-election. Ned Davis also goes on to point out that since 1952, when there’s been either a 20% decline in the markets or a recession in an election year, the incumbent has not won re-election. 2020 so far has had both. However, Mr. Trump surprised us once before in 2016, and 2020 has been anything but normal. So any outcome certainly is a possibility.
Looking at historic election year data on the stock market, it has been when a Republican president is up for re-election in which the market moves the most. This is both up and down. If President Trump does lose his re-election bid to former Vice President Biden, it will be the first time since 1992 in which an incumbent, regardless of party, loses their re-election bid. That means that there’s an entire generation of investors out there who have not navigated a scenario in which an incumbent has lost their re-election bid. This could potentially increase stock market volatility.
Regardless of how the market decides to act to whatever outcome happens on November 3rd, the FSA Safety Nets stand ready in the event that the market decides to sell off. We will exit based on our process and avoid the choppy waters. However, if the market decides to rally into the year end, we stand ready to benefit from that as well.