Elections bring uncertainty and volatility to markets. They can also bring endless nonsense to your inbox. While turning off social media is tempting, the impacts of elections are too important to ignore. As an antidote, LearIM has launched “Stock the Vote” (STV) to share non-partisan, fact-based analysis. We explore politics from the perspective of an investor. Each party has a separate set of facts, but STV offers a third set of facts required to navigate 2024.
The following is the format we will follow to discuss the impact of the elections on capital markets.
Super Bluesday: Issue 2 - March 7, 2024
Primaries (Early): Since our last note, South Carolina held its primary on February 24. Donald Trump beat Nikki Haley in her home state by a comfortable margin. Michigan held its primary on the 27th and Trump’s momentum continued with another win. The streak continued until Washington, D.C.’s 19 delegates were awarded to Haley to start the March Madness. The intensity heated up on March 5—Super Tuesday—when 15 states and one territory held primaries.
Super Tuesday: The political landscape has become slightly clearer now that the Super Tuesday results are in. Trump won all but one of the big day’s primaries, losing Vermont to Nikki Haley. That one win wasn’t enough to buoy Haley’s hopes, so she announced on March 6 that she was dropping out of the Republican primary. Biden also swept all but one of his primaries, losing America Samoa to Jason Palmer, a relatively unknown entrepreneur.
Both Trump and Biden are within striking distance of the required number of delegates they each need to secure their respective parties’ nomination. Trump has 1,013 of the 1,215 required Republican delegates; and Biden has 1,520 of the 1,968 required Democratic delegates. According to the Associated Press, the earliest Trump can officially secure the nomination is March 12, with Biden not far behind on March 19.
General Elections: This month we’re reporting on the presidential election because as important as the congressional races are, they are too complicated at this early stage of the cycle, so we’ll wait to report those figures until they are more meaningful. The current polls of the presidential election from RealClearPolitics.com:
It is important to note the “This Day in History” line at top of poll chart that states at this time in 2016, Hilary Clinton was leading in the polls. Further, Biden was leading the polls in March 2020. In other words, polls can change at this early stage of the election—there is just too much that can happen between now and November. We will watch carefully for changes to gauge any trends in sentiment.
With Trump still holding a lead in the early polls, we turn to the betting odds from Oddschecker.com to peep the odds of being elected president in the gambling world.
Trump is still the favorite to win the general election at even money. Biden is a 2-to-1 shot. Gavin Newsom is a long shot, but has the third best odds of winning.
Effects on the Markets:
We learned in last month’s STV that election years are traditionally positive for stocks. Further, the party of the winner is not as important as the stage of the economic cycle during election. The 2024 election year is off to a positive start with S&P 500 up 7% in the first two months.
When discussing the effects of politics on the markets, it is important to note that politicians often make promises in an election campaign that never come to fruition. Many of the items on a politician’s platform are strategically created to win votes and have little chance of ever becoming a reality.
Since it currently appears that we are facing a Biden-Trump rematch, we look to the 2020 election for clues to how markets behave in this match-up. We explore 2020 with a giant disclaimer: the economy was in chaos due to COVID. We also have the history of Trump winning an election in 2016. This is a rare election where we can analyze previous wins by both of the current candidates.
To kick it off we analyze one sector that should be influenced by politics: defense (military) spending. Traditionally, Republicans have supported more spending on military. We examine the return of defense company Lockheed Martin (LMT) during the 2016 Trump win and the 2020 Biden win. We also look at the year after.
2016 = 18.4% (Trump win) --> 2017 = 31.6% (Year after Trump win)
2020 = -6.4% (Biden win) --> 2021 = 3.2% (Year after Biden win)
In the past two elections, LMT provides an example of how stocks can move based on the winner’s political agenda. We also examined the return of the energy sector by tracking the XLE (energy ETF).
2016 = 28.9% (Trump win) --> 2017 = -0.90% (Year after Trump win)
2020 = -32.6% (Biden win) --> 2021 = 52% (Year after Biden win)
We conclude that election years can be good for the stock market and even better for specific industries and stocks, but the return of energy sector in 2021 proves there are no foolproof rules to what works.
In addition to sectors, there are larger, macro issues to consider. Taxes are one of the biggest issues in this election cycle. After the 2020 election of Biden, tax rates were not raised as many had anticipated. However, the expiration of the 2017 "Tax Cuts and Jobs Act" (TCJA) has various provisions set to expire after 2025. This will force the issue of higher taxes upon the executive and congressional branches. At the end of 2025, the following will occur unless action is taken:
- Tax rates revert to pre-TJCA levels:
- The state and local tax (SALT) deduction currently limited to $10,000 will revert to fully deductible.
- Mortgage interest deductibility will revert up to the first $1mm and up to $100k on home equity lines.
- The standard deduction will be halved (adjusted for inflation).
- Child Tax Credit will return to $1,000 per child from $2,000 per child.
The outcome of the elections will provide clues to the fate of the tax rate in future years. This could have a meaningful impact on the stock markets.
Conclusion:
The early primaries and Super Tuesday results make it almost inevitable our country will have to stomach a Biden-Trump rematch. The fate of the congressional elections is still in the early stages. We are now preparing for the presidential campaign to intensify. The media and your crazy uncle are poised and ready to send a 2024-style barrage of partisan heavy nonsense to your iPhone.
STV will continue to provide the facts on how elections could affect the capital markets. We will explore potential macro impacts (like taxes), industries, and stocks in future issues. Until next time…
Keep your inbox clean, your mind calm, and your portfolio dynamic.
This letter is for informational purposes only. The content herein contains the observations and opinions of the author, is not intended to provide investment advice, and should not be relied upon for any investment decisions. Past performance is no guarantee of future results and information pertaining to our processes is subject to change at any time without notice.