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Insights on the 2016 Election

By Kenneth J. Entenmann, Chief Investment Officer

NBT Wealth Management

November 7, 2016 – Election Day is fast approaching and many are questioning what this election means for the financial markets. There is no doubt that this has been one of the most controversial Presidentia¬≠l campaigns in recent memory and that has led to predictions of economic catastrophe or a “colossal panic” in the financial markets if he or she gets elected. Yet, a quick look at history tells a far more boring and pedestrian story. Presidential elections rarely have a material impact on the financial markets. Why? Because the resident of the White House still has to contend with Congress and the Judicial Branch. Today, the Democrats control the White House while the Republicans control the Senate and the House of Representatives. Presidential campaigns are about making big promises that rarely get enacted because the majority of the time the opposing party controls at least one of the three arms of government. That is, we typically have a “split government” that makes bold initiatives difficult to pass.   

In my opinion, there is a high probability that the post-election government will continue to be split. Our election analysis is based on three general assumptions:

  1. The Presidential election will be close, as most polls suggest
  2. Control of the Senate is uncertain
  3. The House will remain under Republican control

Currently, the House sits firmly in control of the Republican Party. There are 247 Republican seats and 188 Democrat seats. In order for control of the House to flip, the Democrats would need to pick 30 seats. Given today’s gerrymandering that has resulted in a large number of “safe” seats, this is unlikely to happen unless Hillary Clinton wins by a wide margin. While a change in control in the House is not impossible, it is highly unlikely. Thus, the House should remain in Republican control.

The Senate, however, is up for grabs. The Republicans currently control the Senate with 54-45 (1 Independent caucuses with the Democrats) majority. A swing of just 5 seats would result in a change of control. Moreover, there are 34 seats up for election on November 8, of which 24 are currently held by Republicans. Seven of those seats have an incumbent Republican Senator running in a state that went to President Obama in the last election. A change in control in the Senate is a distinct possibility. If the presidential election is close, the Senate too will be close. If either candidate wins by a large margin, than control of the Senate will most likely go to the winner’s party.

Therefore, there is a high probability that a “split” government will be the result of this election.

So what does this mean for the financial markets? In general, the financial markets like split government. As the accompanying chart demonstrates, stock market returns are very similar regardless of the political make-up of Washington. From a statistical perspective, the correlation between White House control and stock market returns is statistically insignificant and very close to zero! The election may create some initial volatility in the immediate post-election trading days, but history tells us that the volatility will fade quickly and long-term economic fundamentals will drive the financial markets.

 

Source: U.S. House of Representatives, U.S. Senate, Gallup Inc., FactSet, Standard and Poors's, BEA, J.P. Morgan Asset Management.
*In roll call votes where the majority in one party voted the opposite way to the majority in the other. Data compiled by Professors Keith T. Poole and Howard Rosenthal, available at www.voteview.com. Data on voting records are not yet available for the 114th Congress.
**Stock market returns are price returns and do not include dividends. Average annual returns are calculated using year-end to year-end numbers for the S&P 500. During the calendar year of 2001 the Senate changed the party control 3 times. It is counted as being under Democratic Party control for the entire year because Democrats held the chamber for most of the year.
Guide to the Markets – U.S. Data are as of August 31, 2016.

Investors should probably spend their time examining the asset allocation and risk profiles of their portfolios and worry less about the election. Election results are temporal; asset allocation is the primary determinant of long-term investment results!

The views expressed here are those of Ken Entenmann and should not be construed as investment advice. These views are subject to change. All economic and performance information is historical and not indicative of future results.

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