As we head into another election cycle, can history provide is with any clues about how the market or rather the institutional money behaves?
Elections and their respective winning party policy outcomes inevitably have impact on businesses, taxation and the economy. The closer the race is, the more diverse the policies and the more unknown the outcome, the less certainty the markets or investors have.
It would be logical to assume in such instances that institutional money is going to de-risk and hedge their portfolios to some extent going into an election.
As institutional money is the quintessential market mover, one way or the other, we can assume that the predominant movement of stocks and markets heading into this upcoming tense election cycle is going to be bearish or volatile at the very least.
We can also assume however, that in a near zero interest rate environment which is unlikely to change for a couple of years per the new Fed mandate, no matter which party is elected, conditions are ripe for a continuing hard asset expansion and stock market ascent. The Fed has also repeatedly stated it will provide close to unlimited support until the economy is back on its feet and employment numbers are closer to their levels before COVID happened.
What does history tell us when we look at markets patterns around elections? If we look at the last three elections in the chart above, we see a bearish pattern prior to the election and a market that rallies post-election. Given all the other fiscal policy factors stated in this article, the probability for a continuing bullish market is high. The only thing that could derail this prognosis is a possible surprise bank collapse along the lines of 2007/8 or a prolonged period of sluggish growth that defies all analyts expectations. However, as mentioned, the Fed has all but guarranteed the latter will be unlikely under their watch and current policy.
When and how this unlimited asset expansion will end is another question but not one we will need to concern ourselves with in the short term. Inflation is inevitable as are increases in hard asset values. Will this lead to the next uber bubble in hard assets? We think that is a real possibility. As we wrote in a prior blog post, the Schiller P/E index is already at historic highs.
As we have illustrated in this article, patterns around election years appear to repeat in tightly contested elections. Patterns repeat altogether in the markets. Each new market high comes with its own rationale and argument as to why this time is different.