A recent Fidelity nationwide survey finds 74% of investors think which party controls the government has an impact on the stock market—but perhaps not the way you think. A slim 14% believe whoever sits in the Oval Office has the biggest impact, 28% say control of Congress is key, 33% say it’s a combination, while 26% say political control has no impact at all.
What are investors doing about it? Not much. Only 15% of those surveyed have already made or plan to make changes to their portfolios because of the election. The vast majority plans to stay the course.
That’s a good thing, in our view, since history suggests that elections typically have had little lasting impact on overall market performance. Among the most powerful drivers: the business cycle, interest rates, corporate earnings, and when it comes to your personal performance—your investment plan.
“The election may spur volatility—and active investors can try to take advantage of it—but for long-term investors with a solid plan, short-term market swings should be expected,” says John Sweeney, Fidelity executive vice president of retirement and investing strategies. “It’s important to take a long-term perspective. If you have a plan you like, stick with it. If you don’t, work with a professional who can help you build one that will help serve you well, no matter what may roil the markets in the short-term.”
A look back at how the stock market has behaved under different political regimes since 1960 shows that over the long-term there has been no significant difference, on average, between which party controls the White House (see graphic below): The Democratic and Republican average annual returns were both close to 12%. Stocks did about two percentage points better when Democrats swept both the White House and Congress. But a lot more was at play than politics (see graph above). In fact, even using a random criteria like investing in stocks in odd years only would have delivered about 16% average returns, four percentage points above the average, showing the limits of party impact. Says Fidelity sector strategist Denise Chisholm: “Over long time periods, the party composition of our government has not been a critical driver of market performance.”
Why is there not a clearer connection between party control and overall stock market performance? Says Chisholm: “For one thing, there are many other powerful forces at play impacting the stock market, including employment, interest rates, innovation and other competitive forces. Also, stocks have had the tendency to price in the possibility of policy changes well in advance.”
That doesn’t mean a President or Congress can’t change things through new regulations and policies. In particular, tighter regulation can weigh on the sectors it hits. For example, says Chisholm, the potential for drug pricing regulation has compressed multiples in the health care sector. Tighter regulation has also weighed on financial stocks, where returns on equity are now historically low.
But even these trends do not affect all health care or financial companies the same way. At Fidelity, we believe bottom-up, fundamental company research can identify attractive investment opportunities across all sectors of the market.
“History suggests, investors should not take a simplistic view of election results and think one party or another is going to be good or bad for stocks in general, “ says Chisholm. “Still, active managers may be able to take advantage of particular opportunities, or help to avoid specific risks, that result from short-term volatility and could impact company earnings or investor sentiment.”
Opportunities and risks ahead
What are some opportunities and risks emerging in this election and business cycle? For one, a shift from monetary to fiscal stimulus could create risks—from rising deficits—as well as opportunities—for industries benefiting from increased federal spending. Likewise, regulatory shifts could impact different industries. Here are a few trends highlighted by Fidelity portfolio managers in recent interviews with Viewpoints:
Industrials and Materials: Spending could rise
|Tobias Welo||Manager, Fidelity Select Industrials (FCYIX)|
I’m pretty optimistic about industrials and materials next year, and one reason is the presidential election. Statements from both presidential candidates suggest that they would be more hawkish on defense than the current administration and more constructive toward infrastructure spending. Increases in spending would have positive implications for industrials and materials stocks.
In terms of defense, I expect growth in spending due to increased attention to terrorism, which has escalated over the last several years, and also because of concerns about China and Russia. What is important for defense-related stocks is that spending is shifting from purchasing military consumables, like ammunition and missiles, to addressing basic equipment needs. This means big projects with long-term impact. A lot of the current military inventory is nearing the end of its useful life, and I think the government will need to make substantial investments to update and modernize the equipment.
The situation is similar when it comes to infrastructure. The Highway Bill of 2005 provided five years of funding at about $57 billion a year, which was followed by a two-year bill at only $52 billion a year. Last year, Congress approved a new five-year bill for $61 billion a year. That may sound like a small increase, but it will be very meaningful going forward. As with defense spending, the absolute numbers are large, so even relatively small increases over time can have a big impact.
The spending climate among many state governments also is favorable, and I believe those outlays are likely to rise regardless of the outcome of the presidential election. All this increase in spending could set the sector up for a long period of steady growth.
The main risk in the longer run is congressional stalemate. The economy may weaken, but multiyear funding is still set. So the fundamental question is about incremental funding, and the good news there is that the presidential election will likely tee up more of it.
Financials: Expect more regulatory pressure
|Chris Lee||Manager, Fidelity Select Financial Services (FIDSX)|
Many people want more regulation of banks, especially when it comes to consumer protections, and politicians have heard their call. In fact, continued pressure on the banks is an area of common ground for the two candidates. This seeming bipartisanship concerning the financial system extends to Congress. For example, both parties are talking about the possibility of reintroducing the Glass-Steagall Act, the Depression-era law that separated commercial banking from securities activities, which was repealed in 1999.
Setting aside any merits of repealing Glass-Steagall, I think doing so could be disruptive for the economy and the banking system in general. It remains to be seen whether promoting these kinds of reforms is just campaign rhetoric or if Congress will actually try to enact them when the election is over. More broadly, there’s been a growing global trend toward populism, which suggests that regulatory pressure on the sector isn’t going to ease anytime soon.
Ultimately, the performance of the economy probably will continue to have the greatest influence on the financial sector, so the next President’s impact will be determined mainly by the way his or her policies affect economic growth.
For more of Lee’s views on financials, read Viewpoints: Financials: A tricky time.
Healthcare: Pricing risks may be overstated
|Eddie Yoon||Manager, Fidelity Select Health Care (FSPHX)|
Health care stocks as a group have been hurt this year as presidential campaign rhetoric raised questions about drug pricing, and there has been increased uncertainty about the future of the industry’s pricing power.
While there may be a lot of campaign talk about change, I think that ultimately the sector’s pricing power will remain fundamentally unchanged. More importantly, I think investors should focus less on the political landscape and more on the fundamentals. Health care is a growth industry that’s innovating as the world population is aging. It’s also an important export industry, giving emerging markets access to modern-day medicine and modern medical technology methods. Health care demand is fairly insensitive to economic cycles and other macro factors, like the price of oil and the outlook for short-term interest rate moves. This secular demand coupled with innovation provides a great environment to find companies that can compound earnings over time.
I should point out that I don’t think the political uncertainty will dissipate immediately. It may take the first 100 days of the new administration for investors to determine what the new President’s legislative priorities are. But I don’t expect health care policy to disrupt the innovation trend, and I think that the market price volatility in the sector may have moved disproportionately to the actual risk to company earnings.
For more of Yoon’s views on health care, read Viewpoints: Health stocks: Beyond politics.
Energy: Focus on innovation, not politics
|John Dowd||Manager, Fidelity Select Energy (FSENX)|
The media generally makes the case that a Democratic win would be bad for hydraulic fracturing (also known as fracking) because the new policies would generally be detrimental for the U.S. energy industry. At the same time, some analysts have suggested that a Republican win would be good for the coal industry.
I don’t really believe either of those statements has much relevance for researching and buying or selling energy stocks. Coal has suffered because natural gas has moved down the cost curve. That’s basic economics and I don't think any president can change that situation easily. When it comes to oil, I think there are enough geopolitical concerns about oil and natural gas that it seems unlikely that either administration would take measures to seriously curtail U.S. oil production.
Instead, I think that falling supply and growing demand are helping to move the market back into balance. I think we’re close to a cyclical turn in commodity prices, which I believe supports a higher-than-normal exposure to the sector.
While political concerns are a factor, I think the key issues for investors are supply and demand levels, and the innovation that is reshaping the industry.
One area that I think has been affected by government action and the political climate is alternative energy. The concept is great: Solar and wind have gone from about 0.5% of U.S. electricity production a decade ago to 5.5% today. These are important disruptive technologies. But so far, alternative energy has been very challenging to invest in. Barriers to entry have been practically nonexistent, so there’s been rampant competition. At the same time, companies have the problem of serial obsolescence of technology. Even while the market has grown over the past decade, the WilderHill Clean Energy Index has fallen about 80%. How can demand growth be phenomenal, but stock performance be abysmal? The industry is just extremely competitive.
This is another example of why bottom-up, individual company research is so important. It can be dangerous to just pick stocks based on any high-level assumptions about politics or government regulation—you need to understand how competitive and economic forces are affecting each company’s earnings power. I approach alternative energy by trying to pinpoint segments with defendable barriers to entry or advantages due to scale or technology. But it’s challenging, and I have been going slowly.
For more on Dowd’s energy views, read Viewpoints: Energy stocks: What’s next?
- Get our latest views on the market, investing and more. Sign up for Fidelity Viewpoints.
- Research markets, funds, ETFs, stocks and bonds at Fidelity’s Research Center.
- Looking for help building or managing a long-term portfolio? Consider Fidelity managed accounts.
- Are you an active investor looking for shorter-term trading ideas? Sign up for Viewpoints Active Trader Edition.
Past performance is no guarantee of future results.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917