July 21, 2020
COVID-19 and social turbulence continue to capture news headlines but 2020 elections are quickly coming into focus with just over 100 days until November 3.

In this report, we preview Election 2020 from an objective, non-partisan viewpoint. There are undisputed historic links between economic cycles, market behavior and election outcomes. Current high levels of US political polarity can invoke strong voter feelings about issues, parties and candidates on both sides of the aisle. To date, however, continued monetary and fiscal stimulus have driven positive market behavior and overwhelmed any fears or anxieties about potential election outcomes. Despite near term election uncertainty, we believe staying true to a thoughtful investment plan is an investor’s best course of action for long-term success.

Our Take

Election results occur within the broader context of the prevailing economic cycle and should not be considered in a vacuum. The COVID-induced economic shutdown prompted a recession unrivaled in its swiftness. Investors endured a brief but brutal bear market as a result of the 2020 recession, but the S&P 500 has hit the reset button and now rests where it began 2020.

Recessions and market drawdowns have historically been unkind to the incumbent party in the White House, while evidence of recovery has been a tailwind. Voter perceptions about COVID’s economics, the stock market, the ongoing recovery and path forward will have a pivotal impact on the election outcome for the White House, Senate and House elections. The US faces many issues of critical importance this election season; however, our focus centers on topics that markets are highly sensitive to over the next 100 days.

COVID will likely have the single biggest impact on the election. The virus’s effect on the economy continues to be met with massive monetary and fiscal stimulus to support the recovery and risk assets. However, the recent infection surge could be the deciding issue for many voters, especially in highly-impacted swing states such as Florida, Pennsylvania, Ohio, Michigan, North Carolina, Texas and Arizona.

The chart below illustrates President Trump’s margin of victory for swing states he won in 2016, plus Texas and Arizona. Current Real Clear Politics (RCP) polls reflect the deficit by which Trump currently trails Biden. Texas (second highest number of electoral votes) and Arizona have been added to this chart because COVID infection surges in those states have followed recent declining poll numbers in what have historically been red states.

Swing states won by Trump in 2016 will be a deciding factor in 2020 as well.

Recessions and the Presidential Cycle

Historically, weak economic regimes are a headwind for the incumbent party and often lead to a change in control at the White House. There have now been 12 recessions since the end of World War II (WW2). Following a recession, incumbent success at subsequent elections is mixed with four wins and seven losses. However, only four recessions began during year four of the Presidential cycle, like 2020. The incumbent party lost the White House in three of these four previous cases (1960, 1980 and 2008). In the one case where the incumbent party won, a recession actually began the same month as the election (1948).

Our baseline expectation is for a slow, uneven stair step economic recovery that takes us until 2022 to reach previous February 2020 levels of Gross Domestic Product (GDP). This is a headwind for Republican incumbents and a potential advantage for Democratic challengers. However, the first estimate of Q3 GDP will be released in late October immediately before the election. Current consensus GDP estimates reflect a return to positive GDP growth in Q3 which could level the playing field for some undecided voters.

Another important indicator to watch that has correctly forecast 20 of the last 23 elections with 87% accuracy simply asks if the S&P 500 is up or down in the three months prior to the election. In 12 of 14 instances, the market was up and the incumbent party won. Whereas in eight of nine times, the market was down and the incumbent party lost. When the incumbent party has retained the White House, S&P 500 returns have averaged 16.3%. When the incumbent party has lost the White House, S&P 500 returns have averaged 5.9%.

The direction of S&P 500 returns three months prior to the election has correctly identified the winning party 87% of the time since 1928.

Which Candidate/Party is Better for The Stock Market?

This is a common question investors ask every four years for which there is no simple answer. We reviewed the history behind which party controlled the White House, Senate and House for the post-WW2 period (1945-2019) and then overlaid the annual S&P 500 performance for each instance. We found that the S&P 500 Index outperformed under a Democratic White House, and outperformed under a Republican Congress.

We consider these findings to be informative but not actionable as the frequency of occurrences for each partisan combination is small with a volatile range of stock market returns. Ultimately, stock market returns are more closely linked with the prevailing economic cycle than they are partisan politics or an election outcome. Each cycle is different and context matters.

Taxes Will Also Come Into Play This Cycle

The number one question we hear relates to taxes. Tax increases are highly dependent on the Democratic party winning the Senate and the White House. In that case, Democrats would likely utilize the same playbook Republicans used to pass tax reform in 2018, by using the budget reconciliation process requiring only a 51 vote majority. Biden has consistently affirmed his intention to roll back portions of the 2018 Tax Cuts and Jobs Act (TCJA).

A primary target of rolling back the TCJA of 2018 would be higher corporate taxes, resulting in a potentially negative impact on corporate earnings and valuations. So far, stock markets have largely ignored the possibility of higher corporate taxes because massive quantities of monetary and fiscal stimulus have overpowered fears of higher taxes. It would be premature to consider making tax-related investment decisions based solely on any candidate’s tax proposal.

Bottom Line

With just over 100 days until November 3, the 2020 Election is coming into focus. Developments on the issues and expectations in the polls will remain very fluid. Still, economic trends, stock market performance and momentum heading into an election exert more influence on elections than elections do on the economy.


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