Beyond the ballot: the real drivers behind stock market performance

We think investors may be overestimating the impact the next administration may have on the market for a couple of reasons.

1 Campaign promises are often just that because the economic backdrop could impose new realities and put a cap on what’s achievable. Both candidates’ economic platforms appear to us to reflect an overly rosy outlook, with little acknowledgment of the tough choices that may lie ahead if something less desirable than best-case scenarios come to pass. For example, if the economy eventually slips into a recession and tax receipts consequently shrink, the candidates offer no prescriptions for any austerity measures that may be required to address deficit pressures by either raising taxes, reducing spending, or some combination of the two.

2 Any changes to policy may be limited―or off the table―due to a divided government in which the House, Senate, and the White House are not all controlled by the same party, likely rendering many policy proposals dead on arrival.

A quick look at equity performance over the past eight years illustrates the extent to which markets are driven by the macroeconomic and earnings backdrop as opposed to politics.

First, the Trump administration was relatively tough¹ on technology companies and imposed significant tariffs² on China. Oddly enough, two of the best-performing sectors during the Trump administration were U.S. technology companies and Chinese stocks.  

For the Biden administration, clean energy³ and banking regulations⁴ have been two areas of focus; over the past four years, there’s been talk about tougher regulations imposed on traditional fossil fuel energy companies and banks. Ironically, the best-performing sector so far under the Biden administration has been energy, with financials also in the mix.

These market trends are completely at odds with what many investors assumed would happen in view of the respective administration’s rhetoric. Once again, context matters. In the case of the energy sector, for instance, you’ll recall that energy stocks experienced a few negative months before the Biden administration took over and, therefore, were starting from a relatively low base. In a similar vein, the banking sector benefited from rising interest rates in the past few years as the U.S. Federal Reserve (Fed) acted to tamp down inflation.

On the other hand, the technology sector benefited from the low interest-rate environment between 2016 and 2020 when the Trump administration was in office; Chinese stocks, meanwhile, performed well in 2017 as global growth improved. Crucially, the broad S&P 500 Index performed similarly under both administrations.

Bottom line: While politics are often seen as playing a critical role in the economy and markets, it’s the other drivers that dictate cross-asset performance. The macroeconomy (including monetary policy/interest rates), the private sector (businesses) earnings, and valuations are the ultimate drivers of market returns.  

We’re now in a late-cycle environment in which inflation is receding, cracks in the labor market are emerging, and the Fed is cutting rates to try and engineer a soft landing. From an investment perspective, we see high-quality sectors/stocks―those with great balance sheets, lots of cash, and the ability to preserve their margins―as the relative leaders in such an environment.  

Meanwhile, high-quality bonds such as agency mortgage-backed securities, investment-grade corporate bonds, and municipal bonds are offering elevated income and, in our view, are poised to offer attractive risk-adjusted returns. The presidential race may be taking center stage today and commanding our attention, but investors should continue to train their focus on the macro picture and earnings trends. In our view, it’s the most sensible way to approach investing for the long term.

For more market-related insight on the November 5 election, our U.S. election page  takes a look at what’s at stake nationally, provides analysis of historical stock market trends in election years, and explores portfolio considerations for long- and short-term investors.

1 "Trump's Big Tech Contradictions," axios.com, 11/4/18. 2 "USTR Finalizes Tariffs on $200 Billion of Chinese Imports in Response to China’s Unfair Trade Practices," Office of the United States Trade Representative, 9/18/18. 3 whitehouse.gov/cleanenergy. 4 "Biden-⁠Harris Administration Announces Broad New Actions to Protect Consumers From Billions in Junk Fees," whitehouse.gov, 10/11/23.