Monday, May 25th, 2020

Republican Administrations Are Bad for Stocks

 

The stock market has taken heart from the prospect of a Trump presidency and traded to near record levels. Will the Trump bump continue or will it peter out? Here is some practical investing advice based on the history of the market and politics since the Second World War. CNBC reminds us that Republican presidents are not associated with an up market in their first year.

Despite the stock market’s upbeat sentiment around the potential for pro-growth policies under President-elect Donald Trump, history shows that, on average, the first year under a Republican administration hasn’t been great for equities.

“Since WWII, the S&P 500 fell an average of 2.7% during the first year of a new Republican president’s first term in office,” Sam Stovall, chief investment strategist at CFRA, wrote in a note to clients Monday.

The strategist studied the market’s quarterly performance during the first year of Republican administrations, and the findings weren’t as encouraging as investors might have hoped.

  • The first year of the Eisenhower presidency was the only down year of the post WWII bull market.
  • The market lost 40% of its value in 1970, the second year of the Nixon presidency. Ford served during the great inflation of the 1970’s when nothing helped the market.
  • The market fell for the first year of the Reagan administration.
  • The first Bush presidency is the only Republican administration since WWII where the market rose in the first year.
  • The second Bush presidency saw the market fall for two years and then collapse in the last year in the worst recession in 80 years.

In short, Republican administrations are bad for stocks in their first years with one exception. Will this be the case for the Trump presidency as well? Or will the market grow over the years only to collapse from its own weight in 4 or 8 years?

Supply Side Economics

What has investors all excited is the prospect of a repeat of the Reagan years (after the first). This was supply side economics and is explained by Investopedia.

Supply-side economics is better known to some as “Reaganomics,” or the “trickle-down” policy espoused by 40th U.S. President Ronald Reagan. He popularized the controversial idea that greater tax cuts for investors and entrepreneurs provide incentives to save and invest, and produce economic benefits that trickle down into the overall economy.

Supply-side theory has three pillars: tax policy, regulatory policy and monetary policy.

The argument behind supply-side economics is that demand will go up with supply. Try telling that to the Chinese today who experienced near-miraculous growth for decades only to find themselves in dire straits today with too much debt, too little growth and anyone with money trying to get it out of the country and into currencies such as the dollar, Euro, Yen or anything except the Yuan. Our concern is not the first year of the Trump presidency but what comes after. For example, if congress enacts a law that encourages, via tax breaks, corporations to bring offshore cash back to the USA will they use it to expand their businesses and create jobs? Our belief is that any such repatriated money will be used to buy back share or engage in takeover bidding wars to further consolidate economic power in the hands of the few. The downside could be a poorly handled recession that makes the Great Depression look mild in comparison.

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