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Sep 11, 2020

Red or Blue, Does it Matter?

On November 3, Americans will head to the polls to elect their next president. We often get questions around election time, and the rhetoric in this particular election cycle has been off the charts. Is it different this time? Have the Democrats veered into far left territory or do they have a socialist agenda?

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  • Election year
  • Areas to watch in the stock market
  • Market returns under the major parties


On November 3, Americans will head to the polls to elect their next president. The Presidential election has always been held on the first Tuesday following the first Monday in November. This was initially done because it allowed farmers to travel to their polling place (often at least a day away) after Sunday church and before Wednesday market days. November was deemed the perfect month since it was after the harvest and before the dead of winter. It became an official practice when a federal law was passed by Congress in 1845. Sometimes, traditions stay in place long after the rationale for them disappears.


This year’s choice is an interesting one. Both candidates are well past regular retirement age. The current Republican President is perhaps the most polarizing holder of the oval office in U.S. history. President Trump is unlikely to win the popular vote (again), but with a rock solid base of rabid supporters concentrated in enough states, he has a good chance of re-election. The Democrat challenger, Joe Biden, is a career politician selected primarily as a safe choice. Party platforms are really secondary. The real choice, to most, appears to be Trump or not-Trump instead of Trump or Biden. Let’s take a look at specific areas of the market that could be winners and losers based on the election outcome.


Let’s start with the challenger. The Democrats have laid out a fairly robust platform with many significant initiatives. First among them is an acceleration of the green economy. This is negative for traditional energy (oil) and pipeline projects and very positive for electric vehicles, solar and wind. Expect more subsidies for these sectors should the Democrats win. The drug industry would likely see price controls which would limit revenues and profitability for drug companies. An increase in the minimum wage and other labour-friendly policies could increase corporate costs. Of course, an increase in overall corporate tax rates is also a key plank in the Democrat platform that would impact corporate profitability. Expect infrastructure spending to increase with a Biden victory, which is positive for the industrial sector.


The Republicans have not really laid out a robust second-term agenda and the President himself has stumbled to explain what he wants to achieve in a second term, short of law and order and “Make America Great Again” Again (sic). Overall, a Trump win would likely be more of the same. The lower corporate tax rates and less regulation brought into place four years ago would remain, but we would not likely see significant new policy. A second Trump term would likely see increased pressure on China through trade. Energy policy would not change. The Republicans would look to repeal Obamacare should they sweep the presidency and Congress, which would be negative for some areas of the Health Care segment like hospitals and HMOs. Infrastructure spending would also go up with a Republican win (who says the two parties can’t agree on anything?).


Although the above policy differences seem large, when considered in the context of an enormous economy like the U.S., the differences are much smaller than they appear. Both parties like big government. They may have different agendas on what government can and should do, but there seems to be no talk about shrinking the size of government or the debt burden, which has ballooned under COVID-19.


So what is an investor to do given the information above? History tells us to stick to the long-term plan and that elections really do not matter that much to the stock market. Figure 1 highlights U.S. market returns before and after every Presidential election since 1980. Regardless of the party in power, the market has been higher after every election year, with the exception of 2000. In fairness to the second President Bush, the market decline was more a function of the collapsing of the dot com bubble and the terrorist attacks of September 11, 2001.


Figure 1: S&P 500 Total Return Around U.S. Presidential Elections

Election Year 3-months before 3-months after 6-months after 12-months after
2016 -1.3% 7.8% 13.3% 23.7%
2012 3.0% 6.5% 14.5% 26.8%
2008 -19.0% -16.6% -8.4% 6.9%
2004 2.6% 6.0% 3.7% 9.4%
2000 -2.9% -6.1% -11.2% -21.0%
1996 8.8% 9.5% 17.4% 34.5%
1992 -0.4% 7.2% 6.8% 13.4%
1988 2.9% 9.5% 13.2% 27.2%
1984 5.8% 7.5% 7.3% 16.7%
1980 5.5% 1.4% 5.7% 3.3%
Average 0.5% 3.3% 6.2% 14.1%
Positive/Total 6/10 8/10 8/10 9/10

Source: National Bank


We always get a lot of questions from investors at election time. Usually, there is some nervousness around one party winning. In the case of the U.S., that’s almost always the Democrats who are seen as being less business friendly. The rhetoric in this particular election cycle has been off the charts. Is it different this time? Have the Democrats veered into far left territory or do they have a socialist agenda? We don’t see anything in the platform to indicate that this is true. The winner of the election could cause some short-term volatility in the market, but it will likely be much ado about nothing.