The Blueprint

Analyzing the Impact of Elections


Election seasons are always filled with uncertainty and change — two of the largest drivers of market volatility. As the market tries to understand the impact of future policy changes, it can waver until a) the election is decided and b) the effect of potential new policies on corporate earnings are well understood.

Now that Joe Biden has been declared President-Elect investors of all political affiliations want to know what it means for their portfolios. Obviously, anyone setting out to answer this question cannot predict the future. However, we can look back historically at previous market results after presidential elections to understand the potential impact on portfolios. Armed with this information, we hope to provide investors with perspective on what to expect from the markets in the coming months and years.

Market Returns By Party Structure

Source: Source Strategas Research, excludes returns from 2001-2002 where the senate changed hands 3 times. Only time there was a Republican President with a different party senate and same party house was in 2001 when the senate changed over and is excluded from analysis.

As you can see from the illustration above, a historic view of average annual returns from various administrations, shows that the stock market tends to do best under Democratic presidents, and Republican Congresses. At this point we know that we have a Democratic White House, however with the Georgia Senate race still outstanding it is less clear what party will take the majority in Congress. The Congress majority does play a large role in markets because they have more direct impact on the policies and legislatures that can have an effect on industry.

“Red Senate” or the “Blue Wave”

There had been a lot of talk going into the election of the prospect of a “Blue Wave.” Polling estimations predicted that Democrats would sweep both the legislative and executive branches by a wide margin. In terms of of party control, a “Blue Wave” power balance has historically been our most common, making up 40% of administrations going back to 1933.1 In trying to make sense of the impact of the Blue Wave, it’s prevalence throughout history presents a challenge. Democratic administrations have presided over so many historically adverse market environments (i.e. WWII, currency crises, and the 2008 financial crisis) that it makes it difficult to identify the unique properties of the “Blue Wave” that may drive markets in the future.

Interestingly, there is something missing from the previous table — the permutation of a Democratic President, a Democratic House, with and a Republican Senate. The reason it is missing is because it hasn’t happened since 1886,2 and the current power balance we may experience, pending the last results of the Senate race in Georgia. Since we have not witnessed this configuration in the past 134 years, it is difficult to say what this nuanced change in political balance will mean for the markets.

Looking at the potential outcomes of this election, the country finds itself in a strange position. One outcome is so common that it isn’t very telling — and the other so rare that we can’t look to history to attempt to understand. Unfortunately, this isn’t the first time that investors find themselves in a difficult position to measure the impact of global events on the market, and why we suggest that investors don’t even try. Instead, they should be focusing on managing risks across a variety of outcomes rather than attempting to make predictions.

Party Control of the Presidency and Congress, 1933-2020

Source: Southeast Missouri State University, 1933-2010, Wikipedia 2010-2020

Putting Away the Crystal Ball

As we have written before, even the best of experts are often wrong. For example, this can been seen in the polling error of the past two elections. In both cases the reality was quite different from what the experts had expected. Forecast error is not isolated to the political world. It is not uncommon for financial market experts to confidently present forecasts that are ultimately proven wrong, only after they have lead investors down the wrong path. At the end of the day it is simply hard to escape the fact that nobody can predict the future.

“All models are wrong, but some are useful”
. – George E. P. Box (Famous Statistician)

About Blue Square

At Blue Square, rather than trying to predict the future, we aim to prepare for it, regardless of its direction. Using our proprietary technology and rules-based approach to investing, our decisions are not swayed by predictions or emotions.

Our investment strategy has a risk management focus that aims to position portfolios defensively during significant market declines. By systematically raising cash during these periods and then investing it when markets are more accommodating, we aim to create a less volatile investment experience, and ultimately deliver better risk-adjusted returns over full market cycles.

1) Source: Southeast Missouri State University, 1933-2010, Wikipedia 2010-2020 2) Source: Strategas Research

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This blog is a publication of Blue Square Wealth. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of subjects discussed. All expressions of opinion reflect judgment of author as of date of publication and are subject to change. Information contained herein does not involve rendering of investment advice. A professional adviser should be consulted before implementing any of strategies presented. Information is not an offer to buy or sell, or a solicitation of any offer to buy or sell securities mentioned herein. Different types of investments involve varying degrees of risk. Economic factors, market conditions, and investment strategies will affect performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. This document may contain forward-looking statements relating to objectives, opportunities, and future performance of U.S. markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “should,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to economic conditions, changing levels of competition in industries and markets, changes in interest rates, and other economic, governmental, regulatory and other factors affecting a portfolio’s operations that could cause results to differ materially from projected results. Such statements are forward-looking in nature and involve known and unknown risks, uncertainties and factors, actual results may differ materially from those reflected in forward-looking statements. Investors cautioned not to place undue reliance on forward-looking statements / examples. None of Blue Square Wealth or any affiliates, principals nor any other individual / entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances.