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Promises, Promises.

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

Reposted by Roger Banks: For this month's Investment Update, I found this great article written by Kevin Headland from Manulife's Capital Markets Strategy team. He discusses how the governing party in the U.S. affects the markets and that when it comes to sector and equity market performance, there’s more to it than who’s president...

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.

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 favorable 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 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.

(remember from past articles I have shared that Investor sentiment (emotion) has short-term impact while fundaments remain the key driving component to stock prices.

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).

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. 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.

From Kevin Headland, CIM

Senior Investment Strategist.

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