In the middle of summer during this unique election year, it seems as if the political noise is already deafening. As we analyze political events and how they may impact the economy and the markets we strive to maintain an agnostic but lucid view of the data. At Pacific Wealth Management, we believe that economies influence politics much more than politics influence economies. Market patterns do emerge under certain circumstances, however, and are worth understanding so we have fair expectations.
The Race and Economic Implications
The presidential race is tight, though Trump is leading in key battleground states. This could mean that, unlike his unexpected win in 2016, the economic impact of a potential Trump presidency might already be factored into market prices before the election. Wall Street is currently betting on a Trump victory.
A second term for Trump would likely result in less regulation, more tariffs, and lower taxes. Joe Kalish, an economic analyst with Ned Davis Research, suggests that Trump's policies would probably boost economic growth and inflation, leading to a steeper yield curve.
The Importance of Congress
The composition of Congress will be crucial for implementing policies. While the President can influence regulations, tariffs, and immigration, major policy changes need Congressional approval. There is significant support for extending some of the Trump tax cuts, but to what extent will depend on who sits in Congress. Recently, the chances of a Republican-controlled Congress have increased.
Trump’s First Term: A Reference Point
During Trump’s first term, growth sectors of the market (Technology (i.e. Microsoft), Communication Services (i.e. Netflix), and Consumer Discretionary (i.e. Amazon) stocks) were the best performing asset classes within the stock market. The tax cuts, lower interest rates, and less corporate regulation led to this outperformance at the time, along with other widespread technological adoption in areas like cloud computing.
This is contradictory to what occurred in the first three weeks after Trump’s surprise victory, where the sectors of the market that led the charge were what one might expect with a Republican in office. These stocks were primarily in banking, construction, and trading and distribution companies, all expected to do well from future infrastructure spending and reduced regulation. These companies are categorized as Value oriented stocks, as opposed to Growth oriented; by the end of Trump’s term, they substantially underperformed on a relative basis.
Fast forward to today: since the first presidential debate on June 27th, a similar pattern is emerging. Wall Street’s initial reaction to an expected Trump win is already mirroring what occurred during the first 3 weeks of Trump’s term in 2016.
Policy Impact on Sector Leadership
What we’ve also learned in the last eight years is that policy is just one of many drivers of leadership trends in the market. Despite Biden championing clean energy investment during his first term, clean energy stocks have struggled under his presidency (orange line in chart). In contrast, they thrived under Trump as low interest rates, especially post-pandemic, boosted the sector. Conversely, traditional Energy (i.e. Exxon Mobil, Chevron) was the worst performer under Trump but has been the best-performing sector under Biden.
While it can sometimes be volatile, the energy sector is a solidly productive representative of the stock market regardless of who is in the White House. In the short term, the same goes for the Financials sector (i.e. JPMorgan Chase, Visa) where regardless of political party in control, it generally does well during election years.
As the political noise intensifies this year, we will continue to closely and objectively monitor the data to construct and alter portfolios throughout the duration of the year and beyond. Please reach out if you have any questions. We’re happy to be a resource during this unique time.
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