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Editors’ note: Fisher Investments’ political commentary is intentionally nonpartisan. We favor neither political party nor any politician. Fisher Investments’ analysts review political developments and events solely for how they may impact stocks.

For many investors, political fears have picked up after the new Democratic administration pushed through the nearly $2 trillion American Rescue Plan in short order. Many think more extreme, market-roiling policies may be in store. But those concerns are routine in new Democratic presidents’ inaugural years—and Fisher Investments thinks they likely set the stage for stocks to do quite well.

Now, no political party is inherently good or bad for stocks. Fisher Investments’ historical research shows bull and bear markets occur under both Democrats and Republicans—and neither party has a monopoly on good or bad economic policy. Hence, Fisher Investments urges investors to set aside any political biases when making portfolio decisions and focus solely on policies’ potential market impact—not who is behind or in charge of them. This politically agnostic approach is critical for avoiding investment mistakes, in our view.

That said, due to Democrats’ tendency to campaign on tighter regulations, higher taxes and redistribution, many investors perceive them as anti-business. Fisher Investments’ research shows this affects stock returns’ distribution surrounding presidential elections—a market phenomenon we call the Perverse Inverse. Since good market data begin in 1925, in election years when a Democrat wins, the S&P 500 has risen 8.2% on average through 2020. (Exhibit 1) But that figure includes re-elected Democrats, with whom investors are already familiar. When you narrow it to newly elected Democrats, who naturally come with greater uncertainty, the average return drops to just 0.7%. Meanwhile, in election years when Republicans win, returns jump to an average 15.2%, fueled by seemingly more pro-business campaign pledges. In both cases, markets spend the election year pricing in investors’ expectations for what the new president will do.

Exhibit 1: The Perverse Inverse

Source: Global Financial Data, Inc., as of 1/12/2021. Annual S&P 500 total returns, 1926 – 2020.

But in inaugural years, Fisher Investments has seen that the pattern flips. Returns trend below-average under Republicans and above-average under Democrats. The effect is most pronounced under newly elected Democrats, with US stocks averaging 21.8%. What explains this election-cycle reversal? Fisher Investments believes it is the tendency of new presidents from both parties to accomplish less than what markets priced in during the election year. Under Democratic presidents, that generally means relief as the worst fears don’t come true. Under Republican presidents, it usually means disappointment as the highest hopes don’t come to pass.

The reason both parties struggle to enact their promises, in Fisher Investment’s view: They often run into some version of gridlock. This can manifest as partisan gridlock (resistance from the opposition party), intraparty gridlock (when factions within the governing party squabble internally) or a combination of the two. These divisions force politicians to moderate and water down campaign promises—if they aren’t dropped altogether.

It can take a while for gridlock to become apparent, though, as new presidents use their honeymoon period to jumpstart their agendas. That appears to be the case this time, which we think tees up stronger returns later in the year as the reality of gridlock grips tighter. In President Joe Biden’s first 100 days, he used executive actions to rejoin the Paris climate accord, revoke the Keystone XL pipeline permit and reverse several more of former President Donald Trump’s policies. This was hardly unexpected, as a raft of executive actions has become normal for new presidents of both parties. But it hasn’t assuaged market concerns. Biden is now pitching a super-sized infrastructure, jobs and energy bill—the American Jobs Plan—with proposed spending upwards of $2 trillion. On the tax side, the plan includes increasing the corporate tax rate from 21% to 28%.[i] There is talk of a second bill with individual income tax hikes later this year, sparking more fears.

But to argue these developments will take markets by surprise implies they aren’t efficient discounters of information, which Fisher Investments thinks is a stretch. Politicians talked up these issues throughout election-year campaigning, and all the attention paid then allows markets to pre-price them. By the time the president takes office, stock prices already reflect much of the debate. Because the bear market that accompanied COVID lockdowns—and the sharp recovery from it—skewed returns last year, this may be difficult to glean from the numbers alone. But Biden’s infrastructure plan has been in the headlines since early 2020—we don’t think there is much surprise left. Ditto for other eyeball-grabbing proposals. Congress hiking taxes to pay for spending initiatives isn’t a concept that has escaped markets, since Democratic leadership has talked it up ever since Trump inked 2017’s tax cut.

As for executive actions, they make headlines, but lack the bite many ascribe to them since they can only interpret existing law. Consider: In his first week, Biden ordered the Interior Department to pause granting oil and gas drilling leases on federal lands (where about 20% of production occurs) for two months.[ii] Then, two months later—after a review of the process—the Interior Department’s pause quietly expired and it resumed issuing leases as usual. Executive actions also aren’t unchecked, unilateral exercises of executive power. They are subject to judicial review and court challenges—and all that scrutiny saps surprise power.

Now, there has been mounting concern Senate Democrats may move to eliminate the filibuster—which requires 60 votes to overcome opposition, blocking legislation and thwarting many Democrats’ preferred policies. While possible, moderate Senate Democrats currently oppose doing so, which carries big weight in a 50/50 Senate. West Virginia Democratic Senator Joe Manchin went so far as to declare his opposition in a Washington Post op-ed.[iii] Far be it from us to take any politician at their word, but Fisher Investments thinks such posturing highlights the Senate’s difficulty in passing anything remotely controversial. Then too, even if the Senate eliminated the filibuster, bills would still need moderate Democrats’ approval, forcing compromise and likely leading to less radical legislation than many imagine—not to mention the filibuster is just one of several standing rules the opposition can use to grind legislation to a halt. All point to gridlock becoming more evident as the year rolls on, in our view.

Politics is only one stock market driver, in Fisher Investments’ view, but don’t let political bias make you think it is necessarily a headwind. Fearful headlines hint 2021 is just like previous years a newly elected Democrat enters the White House: bullish.

[i] here
[ii] “Revenues and Disbursements from Oil and Natural Gas Production on Federal Lands,” Brandon S. Tracy, Congressional Research Service, 9/22/2020.
[iii]  “Opinion: Joe Manchin: I Will Not Vote to Eliminate or Weaken the Filibuster,” Senator Joe Manchin, The Washington Post, 4/7/2021.  

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return.  This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.      

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