James Swanson, Chief Investment Strategist of MFS, outlines his thoughts on the election and a president's impact on the economy and capital markets.
The Election Buzz
Campaign promises are very different from the reality of running a country. So, a certain amount of discounting need be applied. As we head toward the election season, I want to take a look at some of the influence a president can have on the economy and what an election may mean for the economy.
1. The president can have a large amount of influence over the economy. The U.S. economy is not a command economy. Economic cycles are long lived and have their roots in a combination of factors, including trade and demographics. But because of a series of interventionist laws, the president has broad powers to help extend expansions and accelerate the ending of recessions. The acts include the Budget and Accounting Act of 1921, the Reorganization Act of 1939, the Employment Act of 1946, and the War Powers Act.
2. Historically, we have seen the following market reactions in an election cycle:
o average market gain: 8.4%
o average gain if Republicans win: 10.6%
o average gain if Democrats win: 5.6%
o average gain if incumbent party wins: 13.9%
o average gain if incumbent party loses: 1.2%
3. Defense, health, and financial services industries could be favored by a Republican win.
4. Alternative energy, wind, water, and solar power industries could be favored by a Democratic win.
5. Along with increased globalization, greater world competition, and the shrinkage of the U.S. economy as a percentage of the world economy, the power of the president to influence the U.S. economy is lessened.
6. I expect we will see a return to greater regulation after the Bush years and the most recent economic and banking problems. The bottom line is that the financial system and amount of outstanding credit have become too important to ignore.
7. The three biggest issues that the next president – Democrat or Republican – will face are:
1. mounting federal and trade deficits
2. divergent interests of those who wish to protect U.S. jobs and those who seek greater trade freedoms
3. energy policy and maintenance of national infrastructure
Remember: Democrat or Republican, historically we have seen that election years are good for stock markets! As a citizen, by all means focus on the platforms, the speeches, and the excitement of the campaign. But as an investor, distance yourself from the rhetoric and hype. Remember that the long-term trends in company earnings, worker productivity, and competitiveness, as well as sensible diversification and common sense, all probably matter more to good returns than elections.