How will the outcome of the presidential election impact markets?

While I cannot say that it doesn’t matter who occupies the White House, it’s important to put the presidency into perspective. Naturally the members of the Fed’s Open Market Committee (FOMC), in directing our monetary policy, can have a bigger impact on markets and the economy than the President. While the President appoints the 12 Fed governors, all but the chairman and vice-chairman serve 14-year terms, and their terms are staggered. (The chairman and vice-chairman serve four-year terms.) They are all confirmed by the Senate. Also, five presidents of regional Federal Reserve Banks also sit on the FOMC. So the next president (or any president) does not call the shots on monetary policy.

Second, under our three-branch system of government with its checks and balances, the president’s powers are in fact rather limited–although you wouldn’t know it when you listen to all the promises being made by the candidates. For example, a president could propose massive infrastructure spending spree that could create a lot of construction industry jobs. But it could only become a reality if Congress agreed to fund it.

And even if the majority of members of Congress are of the same political party as the president, that doesn’t guarantee the President will get his or her big wishes granted. When the country is as divided as the U.S. seems to be today, it is unlikely that the next president will win by a large enough margin to claim and convince Congress that he or she has a mandate from U.S. citizens to making big changes.

It seems more likely that other forces, including the price of oil and global economic trends, will have a far bigger impact on investment markets than the outcome of […]

D2 Capital Management 3rd Quarter Report 2016


Election Fears for Investors: Hype Versus Reality

Politicians and the media do a lot of talking about the economic implications for each political platform during major elections, which mostly creates a lot of noise.

In turn, much of this noise creates market volatility. However, noise and volatility become less relevant over appropriately longer time horizons for equity market investors.

History suggests to us that what happens within the Washington, D.C. beltway has little relationship with the broader U.S. economy and long-term financial market fundamentals. It is the fundamentals that really matter for investors.

Consider the price change in the large cap U.S. stocks for every administration since President Hoover. The only relationship between political party and stock market returns is that the market has seemingly performed better under Democratic administrations, but even that is a spurious relationship. Two Republican presidents, Herbert Hoover and George W. Bush, had the bad luck of beginning their terms after the stock market had huge runs in the 1920s and the 1990s. Certainly, it could be said that the Hoover bubble burst was brought on by the Great Depression, and the Bush presidency ended with the 2008 financial crisis. However, in both cases, markets were set to fall from lofty price levels. If one were to adjust the results for this bad timing, the stock market returns under both party’s administrations becomes much closer over time.

None of the inputs to economic growth (labor force and productivity growth rates, along with inflation), corporate revenues, and earnings in aggregate are directly and significantly impacted by a presidential administration. Granted, an administration may have significant influence on specific industries through various policy measures (e.g. regulations or subsidies), but, in aggregate, what drives the U.S. economy is the stable growth rate of our […]