Presidential Elections Don't Affect Markets As Much As You Think

Adam Fischbaum's picture

Monday, August 8, 2016 - 7:30am

by Adam Fischbaum

For as long as I can remember, presidential candidates, their surrogates and the news media have always proclaimed every election as "the most crucial in our nation's history". Incidentally, my presidential campaign cycle awareness dates back to 1972. 

While I agree that presidential elections are an important exercise, I'm hesitant to label every one of them "crucial". Case in point: George H.W. Bush versus Michael Dukakis in 1988. I mean...seriously?

2016's contest has been anything but ordinary and, no surprise, I'm starting to field phone calls from nervous clients about what course of action they should take as the general election cycle picks up engine pressure.  So I decided to go back and look at the performance of the S&P 500 during the general election cycles going back to the 1992 race. I did not include the 2000 and 2008 race, as both were extraordinary in circumstance. In 2000 there was the Gore v. Bush controversy that dragged out the final outcome to December of that year, and in 2008 the Obama vs. McCain contest occured during the depths of the financial crisis.

I hope you like charts. 

At first blush, there appears to be a lot of volatility during all for time periods and there is. However, when you drill down, it's a different picture:

During U.S. presidential election cycles from 1992-2012 (again, excluding 2000 and 2008) the S&P 500 had an average return of 3.87%, with an average low of -2.37% and an average high of 5.64%

Not what I would call huge numbers in what could be called "normal" economic/market and civic environments.

The picture would be different factoring in the two "black swan" cycles of 2000 and 2008, resulting in an average annual loss of 3.4% for the time period. However, those were indeed strange times. By the same token, the nation was dealing with a mild recession in 1992, in addition to Ross Perot mounting a significant third party bid during the election, while in 2000 the collapse of the dot-com bubble was an important financial/economic factor. 

That being said, the 2016 contest is turning out to be a real head scratcher that, at times, resembles a fully involved dumpster fire. So what action should investors take?

My first instinct is to say "nothing". But in my 20 plus years in the investment racket, I've found that's not a great tactical answer. 

Before the Labor Day holiday, investors should review their portfolios, which is just a good habit anyway. Consider lightening up on any holdings where prices look a bit stretched out. This piece I wrote back in March on harvesting gains might help. 

The cash raised will serve two purposes: acting as a buffer if markets get choppy and creating dry powder to add high quality, modestly priced, dividend paying, large cap stocks to your mix.

Here are two names I like.

Pfizer, Inc. (NYSE: PFE) -- After changing the love lives of tens of millions of aging baby boomers with the accidental wonder drug, Viagra, Pfizer has grown, mostly through acquisition, into one of the world's largest pharmaceutical companies. In addition to the "blue pill", other flagship products include the arthritis drugs Enbrel and Celebrex, nerve pain treatment Lyrica, and the pneumonia vaccine Prevnar. While revenues have slumped around 1.5% year over year due to the company focusing on restructuring and cost controls, 2016 earnings per share (EPS) are expected to come in at $2.45; a 97.5% pop over 2015 results of $1.24. And with 90 drugs in the research pipeline and 10-13% sales growth in emerging markets, the target looks achievable.
Shares trade around $35.20 with a forward P/E of 14.3 and a 3.4% dividend yield.

Wells Fargo and Co. (NYSE: WFC) -- With $1.9 trillion in assets, the fourth largest bank in the United States is also the Oracle of Omaha's favorite bank stock, with a spot in the top holdings of Warren Buffett's Berkshire Hathaway (NYSE: BRK.A/BRK.B). It's taken me a while to warm up to covering big bank stocks. However, Wells has performed remarkably against extremely challenging headwinds. After managing the fallout of the 2008 financial crisis, the company has managed to grow EPS at an annual rate of 9.2% over the last five years. Over the same time period, management has grown the dividend at an astounding 41% annual rate. Remember, since the financial crisis, most banks aren't allowed to increase their dividend without permission from the Federal Reserve. At $47.84 WFC shares trade at an 17% discount to their 52 week high with a forward P/E of 11.8 and a 3.2% dividend yield.

Risks To Consider: While I chose to examine four seemingly "normal" election cycles, as I mentioned earlier, the 2016 race seems to be anything but. There are also many external factors that could influence markets and elections such as international or domestic terrorism. Also, both stocks are in sectors which are highly susceptible to risk created by government regulation, which always looms during any regime change.

Action To Take: despite the knee jerk reaction to give in to fear or panic created by the uncertainty a presidential campaign can create, the numbers from the recent past tell us that it might not be so bad. Some level headed thinking, selective profit taking and using a slight pullback as an opportunity to buy high quality stocks, such as the ones discussed, at attractive prices seems to be the best course of action in my book.

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Adam Fischbaum does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.