Brad Neuman: Beware the Election?
Many people say the 2020 U.S. presidential election is the biggest and most important election in a century–the starkest divide between two ideologies and two directions for the country in decades. If that were the case, we would expect it to be immensely important for the stock market’s subsequent performance, right? Nope, not in my opinion. ​The expectations leading up to the election are likely to produce swings in sentiment and stock prices, but ultimately over the following four years of the next presidency, I believe the results of the election are unlikely to drive U.S. equities for two reasons.

  1. Major legislation is unlikely to be passed. Without Congress in the hands of one party, it is difficult to pass meaningful new laws. And the current divide of political power is unlikely to change. According to the Cook Political Report, the Senate has 50 seats, where a Republican is likely to win or retain power, while the Democrats have 46. Additionally, there are four “toss-up” elections, of which three are Republican incumbents. Going by those numbers, it seems likely that the Republicans will retain control of the Senate. In the House, there are 217 seats that are likely to fall into Democratic hands and only 193 occupied by Republicans with just 24 elections that are too hard to call. Therefore the Democrats are expected to maintain control of the House. The stock market will likely appreciate this gridlock given that since 1950, the median price performance of the S&P 500 has been over 12% when there is a divided government versus 9% after a sweep of one political party.

  2. Business fundamentals are more important than changes arising from legislation. To illustrate the point, let’s look at recent history. If politics were the big driver of stock performance, then investing in a portfolio of companies within the S&P 500 that has a more domestic focus would have surely outperformed given Trump’s “America First” doctrine. The chart below shows the performance of such a portfolio. Since the election, it has underperformed although it did have a stretch of outperformance around late 2017 into 2018 when the corporate tax cut was passed. This makes sense given that more domestically oriented businesses had higher tax rates and therefore stood to gain the most from the new legislation. However, the impact of the tax cut on stock performance faded. On the other hand, non-political drivers of business fundamentals matter much more, as evidenced by a portfolio of what we believe are the most innovative companies in the S&P 500 significantly outperforming both the “America First” portfolio and the broader market.

So, will the dinner table conversation send relatives running for cover as the topic turns to politics over the next several months? No doubt it will. But will we look back on this election as the one event that defined our relative returns in the first several years of this decade? Probably not.


The views expressed are the views of Fred Alger Management, LLC as of December 2019. These views are subject to change at any time and they do not guarantee the future performance of the markets, any security or any funds managed by Fred Alger Management, Inc. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.

This material must be accompanied by the most recent fund fact sheet(s) if used in connection with the sale of mutual fund shares. Fred Alger & Company, LLC serves as distributor of the Alger mutual funds.​

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