Possibly the most important event of the year has finally approached. The US presidential election and, more importantly – its result – holds power to affect a broad range of variables worldwide. Starting from social security of less protected groups of Americans and ending with major geopolitical events, including war escalation. Somewhere in the middle of this spectrum, the stock market and other financial instruments may also be strongly affected by the political party in power and the main person leading the United States.
Table of contents:
- The power to affect the stock market
- Democratic administration: sector beneficiaries
- Republican administration: sector beneficiaries
- Which administration may be “better” for the stock market?
- Other considerations – budget deficit
The power to affect the stock market
The presidential administration tends to influence market sectors in distinctive ways, depending on the policies and priorities of each political party. While not every administration follows the same pattern, historical data shows trends where certain sectors perform better depending on whether a Democrat or a Republican occupies the White House. Factors such as tax policies, government spending, environmental regulations, and approaches to foreign policy play a critical role in shaping which sectors may benefit.
As investors cope with the uncertainty, stock markets often see increased volatility in the period leading up to the presidential elections. As both presidential candidates – Donald Trump and Kamala Harris – are fighting “neck-to-neck” and there is no one distinct favorite, investors are holding back with any rush investment decisions. This may indicate that once the outcome of the election is clear, investors might take sharp movements in one or another direction.
While the stock market generally reacts to many political, economic, social, and even “black swan” events, history shows us that each administration has their own priorities. Acting in favor of these priorities, the White House has the power to affect various stock market sectors.
Democratic administration: sector beneficiaries
When Democrats take office, they often focus on social programs, healthcare reforms, environmental protections, and labor rights. Historically, Democratic policies emphasize regulation and increased government spending in areas like healthcare, infrastructure, and green energy, as well as initiatives to reduce income inequality. For example, the Biden administration focused on reducing carbon emissions and rejoining the Paris Climate Agreement. While the Obama administration’s Affordable Care Act positively affected healthcare providers and insurance companies. Democrats are more inclined to fund public health initiatives and support medical research that develops new treatments and diagnostics.
Furthermore, Democratic administrations often promote infrastructure spending, which includes rebuilding roads, bridges, public transit, and broadband expansion. Companies in the construction, engineering, and materials industries may benefit from increased government contracts and funding, leading to higher stock performance. Democrats are also often seen as supporters of innovation and are more likely to favor policies that support emerging technologies in clean energy, artificial intelligence, and digital infrastructure. These policies can create favorable conditions for tech companies, especially those focused on advancing digital connectivity and supporting environmental goals.
Republican administration: sector beneficiaries
Meanwhile, Republican administrations historically have shown different interests prioritizing a more business-friendly approach by advocating for lower taxes, fewer regulations, and policies favoring free-market capitalism. Republican administrations are known to support the oil and gas industries, preferring policies that reduce regulations on fossil fuels and open federal lands for energy development, which positively impacts stock performance in these sectors. Furthermore, Republican presidents frequently advocate for strengthening the US defense capabilities, benefiting defense contractors and aerospace companies.
Republican administrations also traditionally support policies that ease financial regulations, which can lead to a favorable environment for banking and financial services. This may lead banks to enjoy more flexibility in lending practices, mergers, and other financial services, thus boosting profitability and stock prices in the financial sector. Similarly, in the past, Republicans have implemented deregulation and tax policies favorable to manufacturing and industrial companies. By cutting corporate taxes and reducing environmental restrictions, Republicans have created conditions that help manufacturing companies reduce operational costs and increase profitability, bolstering their stock performance.
As an example of the above findings, we may look at some of the acts by Donald Trump during his first presidency. As there is no reason to believe that the Republican presidential candidate has changed his priorities since his first presidency, these accomplishments may give us a quality insight into how his second presidency might look like. The Trump administration worked on rolling back imposed regulations on banks following the 2008 financial crisis, reducing regulatory scrutiny for them. While on the subject of undoing some of the work done by previous administrations, Donald Trump also vowed to repeal Obama’s Affordable Care Act and announced the withdrawal from the Paris Climate Agreement (only for Biden to rejoin later on). The previous Trump administration also focused heavily on military funding, which saw companies like Lockheed Martin, Northrop Grumman, and Raytheon experience growth in stock performance.
Which administration may be “better” for the stock market?
While at first glance, it may seem that the stock market should benefit more from the Republican administration, a report by Lubos Pastor and Pietro Veronesi from the University of Chicago shows that during the last century, the US economy and stock market actually performed better during Democratic administrations. The researchers found that between 1927 and 2015, the US GDP grew by 4.86% under the Democratic presidencies and only 1.7% under the Republican presidencies. In the same period, the US stock market’s equity risk premium was 10.9% higher under Democratic presidencies in comparison to Republicans. As one may suspect, the stock market also managed to generate massive gains during Joe Biden’s presidency. The S&P500 index has gained roughly 50% since January 2021, when Joe Biden became the US president (the second-best performance after the dotcom bubble during fellow Democrat Bill Clinton’s presidency).
One of the reasons that might explain the above tendency is that in the past, Republican representatives in the White House have favored more active shifts in the nation’s policies regarding domestic economic developments, as well as foreign relations. Such shifts may cause considerable volatility in the markets as investors face uncertainty about the future. If Ms. Kamala Harris continues the Democratic administration in the White House, fewer changes in foreign and domestic policies might lead to lower volatility in the stock market.
Other considerations – budget deficit
While the above-discussed division of sectors benefiting from the US administrations may provide valuable information, investors should keep in mind that other variables – such as economic cycles, global events, and evolving technologies – also play a crucial role in shaping stock performance. Thus, while historical trends offer guidance, a balanced approach that considers the current economic and geopolitical context is essential for understanding sector performance across different administrations.
One such variable worth mentioning is the US budget deficit. While Republicans often worry about the large public debt and even call themselves “more fiscally responsible than Democrats”, history shows that may not be entirely true. For example, during his first presidency, Donald Trump promised to reduce the US national debt. Instead, the US national debt grew by 7.2 trillion US Dollars in four years while Mr. Trump was in the White House – around 30% of the total national debt at the time. A similar tendency is seen when looking at budget deficit and surplus during the Democratic administrations (Clinton and Obama) and the Republican administrations (Bush and Trump) in the graph below.
Source: https://www.democrats.senate.gov/
National debt is a crucial but uncomfortable part of the US economy, which both presidential candidates have tried to avoid during their campaigns. Regardless of who the next US president will be, he or she will have to deal with the ongoing national debt crisis. But judging from the past, one candidate is more likely to reduce the US budget deficit in the next four years, while the other one – increase it. As the national debt increases, it poses a risk to the country’s economic stability and hence – the stock market.
Very soon, we will know who will lead the US for the next four years and conclude which sectors may benefit from the upcoming policy changes. However, while causing short-term market volatility, US presidential elections may have minimal long-term impact. More importantly, a well-balanced portfolio with adequate risk limitations may benefit the most in the long term, regardless of the changes in the White House.
Santa Zvaigzne-Sproge, CFA, Head of Investment Advice Department at Conotoxia Ltd. (Invest.conotoxia.com investment service)
Materials, analysis, and opinions contained, referenced, or provided herein are intended solely for informational and educational purposes. The personal opinion of the author does not represent and should not be constructed as a statement, or investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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