Quarterly Commentary – October 2020

What a year this has been. We hit an all-time high of 29,551 on the Dow Jones Industrial Average (DOW) on February 12, 2020 followed by the initial impact of the COVID-19 virus and subsequent collapse of the stock market resulting in one of the worst performance quarters in history with the DOW down to 18,591 and closing on March 31, 2020 at 21,917. A focal point for stock market pundits at that time was, will this be a V, W, U or L shaped recovery? As it turns out the stock market recovery was a V with the DOW closing on September 30 at 27,781.70. Not many gave that much of a chance.

Now the big discussion is “How will the Election results effect the stock market?” My quick answer is that I really do not believe Wall Street cares one way or the other. Biden has been in government for so long that he is known quantity and I think most believe that while he may be campaigning to the left, he would govern more in the middle. Trump on the other hand has not been in government as long but Wall Street feels comfortable with his low tax, less regulation policies.

But let’s look at history and see what if anything we can decipher from past returns? Looking at stock market returns from 1925 forward we find some interesting possible answers to that question. We pick 1925 as our starting point because it was in that year the Standard Statistics Company (later becoming the Standard & Poor’s company) first began reporting its index of 90 companies on a daily basis.* From 1925 forward there are 94 years of data and here are the results:

  • Number of years Republican President – 46
  • Number of years Democrat President – 48
  • Up/down stock market return in years Republican President – 31/15
  • Up/down stock market return in year Democrat President – 38/10
  • Average annual return in Republican President years – 9.06%
  • Average annual return in Democrat President years – 14.94%

 

Some will say that these figures are not meaningful since they take in to account the string of Franklin Delano Roosevelt years (13) that will not be repeated. So, taking that in to account we did the same analysis from 1960 forward (torch was passed to a new generation) and those results are:

  • Number of years Republican President – 31
  • Number of years Democrat President – 28
  • Up/down stock market return in years Republican President – 22/9
  • Up/down stock market return in year Democrat President – 24/4
  • Average annual return in Republican President years – 8.84%
  • Average annual return in Democrat President years – 14.65%

 

From these numbers it becomes clear that the U.S. stock market goes up many more years than down and if you just look at stock market averages (based on the Standard & Poor’s 500 Index) a Biden victory in November, i.e., Democrat President could be positive for the stock market. This may be counterintuitive to many as the conventional wisdom is that Wall Street financiers favor the Republicans but in reality, stock markets tend to perform better in Democratic years. This is not to say that we are rooting one way or the other, just presenting the facts.

Next, we looked at years that one party controlled the House, Senate and White House. Since 1933 this has occurred 23 times with Democrats holding all three 20 times and Republicans only three.** In those years, i.e., total control by one party the stock market average return in Democrat total control is 9% and when Republicans have all three the average return for the stock market in those years is 13%.*** That looks like a big advantage to the Republican side but keep mind they only have 3 occurrences with control of government so an average of only 3 years would not be considered statistically significant.

So where do we stand on who is better for this current stock market? I wish I could give a definitive answer. However, that is not possible to us or anyone else for that matter. All is just conjecture until the event really happens. However, what we do believe, regardless of who the victor is on November 3 is that our economy and that of the rest of the world will over time grow. That is the true nature of history. People want to do better and principally each generation wants to do better and make life better for the next generation. That in our belief is a fundamental truth that will not change. COVID will be defeated. Life will get back to normal. This may be a “new normal” but normal nonetheless. Travel will pick up. People will seek respite from their time in “captivity” and above all, families will reunite and Grandparents will hug their Grandchildren and life will go on.

Current Data for the Dow Jones Industrial Average found at https://www.morningstar.com/markets historic data before the year 2020 found at the websites noted above. Past performance does not indicate future results. This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed by LPL Financial. as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. The Dow Jones Industrial Average is a popular indicator of the stock market based on the average closing prices of 30 active U.S. stocks representative of the overall economy. The Standard & Poor’s 500 Index is an unmanaged Index of approximately 500 large US companies.

*https://www.reuters.com/article/us-usa-stocks-sp-timeline-idUSBRE9450WL20130506
**https://cstl-cla.semo.edu/rdrenka/ui320-75/presandcongress.as
***Kiplinger Personal Finance, September 2020, Election and Your Money