The year of living dangerously

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  By Guest Blogger Doug Rowat

Buckle up.

Don’t look now, but we’re down to only a little more than one year remaining before the next US presidential election. Three hundred and eighty-one days to be exact (but who’s counting).

And we’re likely heading into what will be one of the wildest rides in US political history. Joe Biden, who at one point seemed like a lock to take the Democratic nomination, is now basically tied in a head-to-head slugfest with Elizabeth Warren. The sitting president meanwhile is the subject of a US House impeachment inquiry and seems hell-bent on creating as many controversial distractions as possible even if it means losing the support of the GOP and, gasp, Fox News. I wouldn’t want to be a Kurdish fighter right now, but, hey, that’s politics.

And, here’s what influential Republican senator Lindsey Graham—who earlier this year warned Republican politicians to “stand behind this president [or] we’re not going to stand behind you”—had to say last week about Trump’s northern Syria decision:

Source: Twitter

Up is down and down is up. And we haven’t even gotten to the presidential debates yet. Close your eyes for a moment and picture the surreal scene of Warren in a debate with Trump—Pocahontas versus Cheeto Jesus, winner take all. Their two visions of America couldn’t be more diametrically opposed and the debate rhetoric on both sides is likely to take viewers deep into the Twilight Zone. As Morgan Freeman helpfully advised Brad Pitt in “Seven” as the two prepared to confront the diabolical Kevin Spacey: “If John Doe’s head should split open and a UFO fly out, I want you to have expected it.” So, you’ve been warned.

However, as I’ve noted several times on this blog, people like to think that they’re special and living in the most consequential and turbulent times in history. Sure, this coming political year will probably be pretty crazy, but will it be more tumultuous and significant than the elections and election campaigns held during and after World War II, after the Kennedy assassination, during the 1970s energy crisis or during the heart of the 2008 financial crisis with the US mired in its worst recession since the Great Depression with massive US financial institutions routinely going bankrupt? Probably not. However, we’re all basically hard-wired to feel self-important and assume that OUR time—and only OUR time—is historic. But it’s probably not, at least not any more historic and important than other key periods in US history.

For the record, below are the US equity market performance numbers in the year prior to every single presidential election going back to 1940. As you can see, the split between Democratic and Republican presidential winners has been dead even—10 each—and markets have traded higher almost every year, typically generating strong, double-digit returns. Regardless of who’s in power or more likely to win, markets go about their business. Political campaigns create noise and occasional market volatility, but they’re generally ignored by investors. Markets focus far more on corporate profitability, economic strength, consumer health, central bank policy and so on. And, in our view, most of these factors remain favourable for equities.

Three down, one to go. Here’s how the market historically performs the year before US presidential elections.

Source: Bloomberg, Turner Investments

So, it’s no doubt going to be a noisy political year, one filled with mind-bending controversy, wacky debates and back-and-forth lead changes in the polls.

But, politics be damned, history tell us that markets will probably do what they most often do ahead of a presidential election—move higher.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.