3 things that interest the stock market more than who becomes president

Here’s what history tells us about what to expect from the long-term performance of the stock market after the 2020 presidential election: If President Trump wins re-election, it will likely increase. And if his challenger, former Vice President Joe Biden, heads to the White House, it will likely rise further.

Regardless of who is in office, stocks tend to underperform the first two years after an election and then perform well in the third year. Tracing back to the first election in 1789, a Fidelity analysis found that four-year stock returns were almost identical regardless of the party in the Oval Office: 8.6% for Republicans and 8.8% for Democrats. .

The performance of the stock market is driven by forces far greater than whoever becomes commander-in-chief. Here are three factors that matter much more to Wall Street than who wins the presidential election.

1. The severity of the coronavirus

2020 was the year of COVID-19. The last week of October began with three straight days of declining stock markets, as fears of an overall spike in cases mounted.

It is easy to establish a false correlation between election results and stock market performance. But in general, stocks continue to move in the direction they were heading before the election due to what was already happening in the world at large.

the S&P 500 the index fell more than 6% between election day 2000 and the inauguration of President George W. Bush. But stocks have been on a downward spiral since the dot-com bubble began to collapse the previous March. The S&P 500 fell about 20% between Election Day 2008 and President Obama’s inauguration in January 2009. But the United States had already entered a recession in December 2007, and the stock market had crumbled less than two. months before the election after the financial collapse.

Similarly, stocks rose between Election Day and Inauguration Day in 2004 and 2012, when Bush and Obama were re-elected, just as they did after President Trump’s victory. in 2016. But they just continued their upward trajectory.

A spike in COVID-19 cases, whether it results in more forced lockdowns or people staying at home voluntarily out of fear, is far more likely to trigger another stock market crash than the one occupying the oval office.

2. What actions the Fed is taking

The Federal Reserve is widely regarded as the most powerful economic institution in the world. He wields much more power over market forces than the president. It sets interest rates. It tells banks how much to keep in their reserves. It injects money into the economy when times are tough. In 2020, the Fed aimed to stabilize the economy with unprecedented actions like buying corporate bonds and creating a program of direct lending to struggling states and local governments.

While the president appoints his presidents – and also has the right to fire them – the Fed is theoretically supposed to operate without political influence. The president has a four-year term, and presidents have historically put politics aside and re-appointed the Fed chief from their predecessor. Current President Jerome Powell’s term does not end until early 2022, but he has gained bipartisan approval for his actions during the pandemic.

3. The level of blockage in Washington

It is often said that Wall Street loves traffic jams. When Congress is divided, it is supposed to be more difficult to pass new regulations and new spending measures. This may be true in normal years, but it was not in 2020.

The S&P 500 hit its lowest pandemic level on March 23 at 2,191.96. But in the week that followed, the index jumped nearly 20% as the House and Senate passed the $ 2 trillion CARES bill and Trump signed it.

Bank of America Merrill Lynch analyzed the impact of the House’s initial rejection of the 2008 Distressed Assets Relief Program (TARP) to estimate what would have happened if lawmakers had not passed the CARES Act. He concluded that the ensuing bloodshed would have caused the S&P 500 to fall to 1720. Over the past few weeks and months, the stock market has risen and fallen alongside hopes for another stimulus package. The Democratic-led House and Republican-controlled Senate have now been deadlocked on further relief for months.

The bottom line: It doesn’t matter who the commander-in-chief is if Congress can’t agree on legislation for the president to sign. Gridlock can be good for stocks to some extent. But in a real crisis, Wall Street longs for government intervention rather than a dead end.