Market declines such as we saw last month are rarely about just one thing. Analysts tend to say that such things happened because of x or y, when in reality they usually happen because of x and y, along with a, b, c, and d as well. This last drop, for example, has been principally blamed on the ten-year yield nudging 3.25%, trade wars, and fears about global growth generally.
All those factors no doubt contributed, along with one other, major thing that has been talked about less, but which may be the most important of all: the coming election.
So, with that out of the way after tomorrow, what can investors expect this week?
Let’s be clear here, I am not talking about what is usually defined as “uncertainty” around an election. A strong argument can be made that the old adage about the market hating uncertainty has been thoroughly debunked over the two years since Donald Trump was elected. One thing we have found out for sure about Trump is that neither his words nor his actions are predictable, and with a seemingly chaotic White House and the Mueller and other investigations in the background, certainty has been a rarity in the administration.
Yet stocks have soared.
No, what seems to have upset the market is not uncertainty, but the virtual certainty that the Democrats will take the House.
This fear of Democrats is nothing new. Traders, fund managers, and large investors tend to be wealthy, free market types, and as such tend to be Republican. Of course, there are several high-profile exceptions to that such as Soros and Buffett, but they are high-profile in part because they are exceptions.
The personal politics of trader types, however, isn’t the reason for the apparent Republican bias in the market; that is down to policy. The Republican party has a history of enacting things like tax cuts and deregulation that favor businesses. One can make political points by arguing about whether those policies are good or bad for society, or even the economy, but they certainly help corporate profits and therefore the stock market.
As I have said here on multiple occasions, politicians have much less of an influence on the economy than most people, and certainly the politicians themselves, think. But, the market is not the economy. It is in large part about expectations, and in this case the expectation is that if the Democrats take the house the pace of pro-business reform will slow, or even be reversed.
It can be argued, though, that from a long-term, broad economy view, that change of pace would be a plus.
The above chart shows the stock market performance under each of the five Presidents preceding Donald Trump. It will probably surprise a lot of people to see that the two best performances came under the two Democrats, Clinton and Obama, with the three Republicans, both Bushes and Reagan, behind them.
Partisans will no doubt argue that this proves that Democrats are better, or that what really matters is who controls Congress, but what the chart shows is that, with GW Bush as the exception, the market generally does its thing, regardless of who’s in charge.
So, on that basis it is only logical to expect that whatever happens tomorrow, the market will recover. If there is a “blue wave” and Democrats take the House (the seats up for grabs make a Senate swing highly unlikely) there might be an immediate, short, negative reaction.
However, before long, the market will realize that the sky isn’t falling, and that one chamber can do little or nothing to change the policy direction of a President with friendly majorities in the Senate and the Supreme Court.
On the other hand, if the Republicans outperform expectations, the market will bounce back in relief and in anticipation of even more tax cuts and deregulation.
Either way, and whether you attribute it to eight years of Obama, two years of Trump, or just the resiliency of capitalism, unemployment is low, growth is positive, and corporate profits are high and growing. There will still be risks from rising rates, trade wars and a host of other things on Wednesday morning, but once the election is out of the way, the reality of the economy will come back into focus and the market can begin to recover.