Promises, promises

The one unchangeable certainty is that nothing is certain or unchangeable. — John F. Kennedy

History has taught us that when it comes to elections, there’s no certainty. It should have also taught market participants that applying an investment strategy based on political campaign promises and platforms is unlikely to be a successful one.

When it comes to the markets or the economy, presidents get far too much credit when things go well and probably too much blame when things go poorly. In practice, it’s very unlikely that one person can influence the approximately $20 trillion U.S. economy or the S&P 500 and its approximately $28 trillion market cap with material and lasting effect. Yet many investors make short-sighted decisions based on that very belief. In reality, any approved legislation must be agreed on by the president and a majority of the many individuals that make up the U.S. Congress.

Leading into the last presidential election, there were many that felt a Trump presidency would be detrimental for equity markets. A quick internet search will find a number of strategists’ views that converge around the prospects for a correction in stocks following a Trump win. CNBC quoted an analyst who said “he would expect a sell-off if Trump wins, then an L-shaped move in the equity market, because of the period of policy uncertainty.” However, from election day, November 8, 2016, to the end of 2019, the S&P 500 index climbed 51%, or 14% on an annualized basis with no correction immediately following the election.

Analysts spend countless hours dissecting each candidate’s policy platforms to gain an edge on what stocks or sectors stand to benefit or be hurt following the election results. Heading into the 2016 election, it was believed that the financials, energy, and healthcare sectors would be weaker under a Democrat administration and benefit under a Republican administration. Looking back, energy far underperformed the S&P 500, while financials and healthcare were in line with the broad index. In fact, since the 2016 election, information technology and consumer discretionary sectors have been leading the S&P 500 Index.

This chart compares the value of the S&P 500 Index to energy, healthcare, and financials sectors from November 8, 2016 to December 31, 2019. Energy trended below the S&P 500, while financials and healthcare were in line with index.

The above suggests that perhaps there’s more at play than merely the governing party when it comes to sector and equity market performance. Within the energy sector, for example, following the 2016 election, the popular belief was that the Republican government would have a positive impact. While government deregulation or favourable policy and permitting was expected to help, the greater factors to performance included global supply and demand, oil prices, and OPEC policy. It helps illustrate that political policy or rhetoric rarely drives equity markets over the long term (or even shorter three-year periods).

Promises are made on the campaign trail that may or may not turn into legislation. These promises may have a short-term impact, as speculation and momentum play a larger role in market movements. But in the end, equity markets return their focus to earnings and the fundamentals that are often pushed to the sidelines during the lead-up to an election.

A quick look at some of those fundamentals would indicate an improving environment. Third-quarter earnings for the S&P 500 Index are coming in better than expected. With 66% of companies having reported, earnings growth is 17% above expectations and down only 8.6% from a year ago.

Further, the most recent ISM Manufacturing Purchasing Managers Index (PMI) survey result of 59.3 would suggest strong earnings growth as early as the first half of next year (an index reading over 50 indicates expansion on a month-over-month basis). Manufacturing is once again expanding in the United States. Historically, a strong manufacturing environment has led to a strong earnings growth environment (with a six-month lag).

Here’s a chart that compares the ISM Manufacturing Purchasing Manager’s Index (PMI) to the year-over-year earnings growth of the S&P 500 Index. There’s a strong correlation between the two, with the PMI leading the S&P 500.

While renewed lockdowns in Europe may stall the recovery, lockdowns are typically short term in nature (four to six weeks) and once they’ve achieved the desired outcome, economies bounce back and markets often recover ahead of it.

In our recent Investment note, “A(nother) random walk down Pennsylvania Avenue,” we examined the performance of the S&P 500 under different U.S. political parties, in terms of president and Congress. Regardless of which party is in power, the difference in market performance is minimal. We continue to caution investors from making decisions based on knee-jerk, emotional reactions but rather to maintain focus on their longer-term investment strategy.

Kevin Headland, CIM
Senior Investment Strategist

A rise in interest rates typically causes bond prices to fall. The longer the average maturity of the bonds held by a fund, the more sensitive a fund is likely to be to interest-rate changes. The yield earned by a fund will vary with changes in interest rates.

Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a fund’s investments.

The opinions expressed are those of Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information and/or analysis contained herein. Manulife Investment Management disclaims any responsibility to update such information. Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein.

All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management Limited, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Unless otherwise specified, all data is sourced from Manulife Investment Management.

Manulife, Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

Kevin Headland, CIM

Kevin Headland, CIM, 

Co-Chief Investment Strategist

Manulife Investment Management

Read bio
Macan Nia, CFA

Macan Nia, CFA, 

Co-Chief Investment Strategist

Manulife Investment Management

Read bio