Another four years have come and gone, which means the election for the most powerful position on the planet is upon us. The presidential election always arrives with some degree of trepidation and plenty of questions. As stewards of our client’s wealth, a recurring inquiry is, “What do you think will happen to the markets if…?” Inves-tors and fiduciaries inherently sense that leadership of the largest economic power in the free world significantly impacts the assets under their dutiful care. But how much does our choice for President drive markets? The Presi-dent certainly influences the economic landscape and, thus, the capital markets to some degree. As forward-looking indicators, they are constantly assessing where the economy will be in the future. In equity markets, it is not today’s earnings but rather tomorrow’s that impact prices.
There is little doubt that the President has a direct influ-ence on the economy. The White House determines for-eign policy & trade relations, appoints leading bureaucrats, and has held historically great sway over corporate and individual tax rules. The effect of many of these initiatives is not instantaneous. It takes a while for an economy as complex as ours to exhibit changes that can be attributed to presidential edict.
There is a question of which political party is better suited to drive economic success. If you believe the Joint Eco-nomic Committee’s data, the economy has done better under Democratic leadership than Republican. However, was it truly the nation’s leader and their policies imple-mented that created such success, or was it that they inherited an economy on the rise?
The influences of the real economy are largely outside of the direct control of the President of any political party. What has been driving the recent market bounce back has largely been attributed to the legislative acts of Congress. The historic stimulus packages that have been engineered to keep the economy moving, in the absence of the consumer, have been an enormous catalyst for thecapital markets’ rebound. If the consumer, who represents roughly 70% of the U.S. GDP, is not able to purchase goods and services in a normal behavioral pattern, due to social distancing and legislative guidelines, it is the government that needed to step in as liquidity of last resort.
Fiscal policy has been another major influence on the capital markets and the economy. The Federal Reserve (Fed) has a dual mandate: full employment and price sta-bilization through managing interest rates. It can be argued that the Fed has taken on a notional third mandate, which is supporting asset prices. With the current zero interest rate policy (ZIRP), the Fed has made borrowing inexpen-sive, promoting growth. Still, I can also argue that it will force investors to the capital markets in search of yield. If your bank account isn’t making you money, investors will find another haven for their investment dollars. If you are a follower of Cornerstone’s Independent Insights, you would have recently read a piece from CIO Kevin Karpuk about why the equity markets have been so resilient in the face of the current economic recession. To summarize, because rates and the yield curve are at historic lows, the market earnings have become that much more attractive and, as such, make the markets more valuable.
The President certainly has influence over the economy. Still, much of it is policy-driven, that carries a long-sim-mering process. Some of their influence can come in the form of appointments to committees like the Fed and the Supreme Court, the ability to support or veto stimulus and spending bills, policies for tariffs on good and ser-vices, but I’d argue that monetary and fiscal policies can more quickly shape the capital markets response to pres-ent economic conditions. The capital markets favor the divided government. They support the system of checks and balances that were the design of our founding fathers. All economies have cycles, ebbs and flows that not even the President of the United States can control.