By John Grace
“If you want your stocks to go down, I strongly suggest voting Democrat,” President Donald Trump said Oct. 30, making headlines trying to scare people again.
In addition to making headlines, President Trump is masterful at making the complicated simple. Please notice that just because an answer is simple, it makes it neither a thoughtful observation nor a correct one.
Another thing President Trump is very good at is throwing a group of people he doesn’t respect under the bus. So let’s be clear, a little stock market “pause” is not the fault of anyone, or any one group, including the Democrats.
One thing the markets do not like is uncertainty. As I have addressed since the first announced talk on tariffs, on a global basis, trade wars are weighing on sentiment. And we all know who started that argument.
On that note, it’s worthwhile to see what happened back in 1930. The government had the best of intentions to protect our farmers by imposing 40 percent tariffs on 20,000 incoming goods. Last week, at the Dent Irrational Economic Summit in Austin, Texas, my friend Charles Sizemore of Dent Research credits that move to be the cause that resulted in the U.S. going from a Great Recession into the Great Depression.
It’s not much different than playing with fireworks in celebration of the Fourth of July, only to wake up the next morning to discover a neighbor’s house was accidentally set on fire. That’s one example of an unintended consequence. It’s what can happen when you play with fire.
Given our president’s comment, here is what’s more interesting.
According to Oppenheimer Funds, “Regardless of party affiliation, investors may try to gauge what will happen on election night and whether to make any adjustments accordingly. The good news, from a financial perspective, is that historically mid-term elections have not had a major impact on the financial markets or provided reasons for investors to make major changes to their investment plans. It’s critical to take a step back and let history be our guide.”
While we are in unprecedented times, which means this time could be different, when we bother to look at history we can see that the market performs well after the mid-term elections, regardless of party.
In fact, from 1800-2018 the S&P 500 performance after the mid-term elections has been positive 78 percent of the time, according to U.S. Congressional Records Global Financial Data. Now the stock market does seem to prefer a divided government, reports Bloomberg.
Annualized returns for the DOW from 1901-2017 are 9 percent per year with a unified government and 10.1 percent returns with a divided government. Investors may fear a divided government with a Democratic-controlled House in Congress in opposition to a Republican administration that could derail President Trump’s agenda and put an end to the historic bull market. But the fact of the matter remains that over history, markets have often performed better with a divided government.
Neil Howe, author and managing director of demography at Hedgeye Risk Management, was a speaker at the Irrational Economic Summit in Austin. He helped put things in perspective.
“Rational people think in straight lines, but history doesn’t move in straight lines,” he said.
It’s hard for some to imagine that the things that happen are not partisan. So it was also interesting to meet David Stockman who served as a Republican U.S. representative and as director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman spent 20 years on Wall Street.
With no advertisers or home offices to please, and with no interest in getting elected to anything, Stockman said, “The wrong Three Stooges were in charge in 2008.” Of course, he was referring to former Fed Chair Ben Bernanke and former U.S. Treasury Secretaries Timothy Geithner and Henry Paulson.
Stockman observed that Quantitative Easing started with the Fed. It was intended to keep the Great Recession from getting worse.
One thing is for certain. No one and no country can increase the debt, as we along with Japan and China have, and expect our issues to simply evaporate with even more debt. When the music stops, things can suddenly change a great deal. Perhaps it’s true. The best entertainer can fool some of the people some of the time, but eventually the showman can’t fool all of the people all of the time.
John L. Grace is president of Investor’s Advantage Corp, a Los Angeles-area financial planning firm that has been helping investors manage wealth and prepare for a more prosperous future since 1979. His On the Money column runs monthly in The Wave.