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ACM Journal - Investment Management
12 Oct

Does the Election Really Matter? – Q3 2020 Newsletter

That’s the way that the world goes ‘round.

You’re up one day and the next you’re down.

It’s a half an inch of water and you think you’re gonna drown.

That’s the way that the world goes ‘round.

– John Prine


Vice President Joe Biden says the coming election is a “battle for the soul of the nation.” President Donald Trump has declared this the “most important election in U.S. history.” Perhaps. Or perhaps the nation’s deep partisan divide is just the way the world goes ‘round. Maybe, as John Prine suggests, we’re extrapolating out the worst-case scenarios because that is human nature.

John Prine was a singer-songwriter that may not have achieved fame among the masses, but he was hugely influential among die-hard musicians. He has been cited as an inspiration by Bob Dylan, Johnny Cash, and Pink Floyd’s Roger Waters. His songs have been covered by countless artists. One of the most intriguing aspects of his music is the insight into the human condition reflected in his lyrics. This is clear from the lines cited above. While humans are often alarmist, the worst-case scenario usually does not come to pass. A little unwanted water starting to rise does not mean it will continue indefinitely. Eventually the metaphorical water subsides, and some level of normalcy returns.

I think politicians, the news media, political pundits, and the most partisan among us could learn a lot from John Prine.

The most radical leftist policies that have garnered airtime the past few years seem unlikely. The dramatic changes in tax policy and government influence required to enact these policies would be rejected by a majority of Americans. Similarly, the hate, racism, misogyny, and fascism that the left accuses the right of are viewed as unacceptable to decent people.

So, would a Biden victory result in a new, China-style ruling philosophy and a catastrophic redefinition of our economy? Would a Trump win mean minority groups should fear for their lives and their basic rights? Some may think so, but both of those seem extreme and unlikely. It is clear that four more years under Trump would result in a presidency focused on the economy and the stock market. Stock market gains are a frequently cited measure by the President for his perceived success in office. But what about a Biden presidency? We’ve received a number of calls with concerns about what will happen to the economy and stocks if Biden wins on November 3rd. We certainly can’t predict what the market’s knee-jerk reaction will be, but over time, history suggests there isn’t much to worry about. Increased regulation and higher taxes would certainly weigh on business activity and economic growth. However, that doesn’t mean they will be a disaster. We’ve had periods in the past when regulations were tighter, and the country has experienced much higher tax rates. Yet, our economic growth over time has been the envy of the world.

It is human nature to want to improve your lot in life. People will still wake up in the morning to go to their jobs or start new businesses. This is true irrespective of which party the president hails from. Democracy and capitalism ensure the rights to pursue “life and liberty”. While these values may sometimes appear to be under attack, lawsuits and the courts ultimately correct dire imbalances. So do the voters. An extreme direction, one way or the other, that results in adverse effects has generally been fixed at the polls. A platform that results in a lagging economy will frustrate voters, who will ultimately oust the ruling party. A minority group feeling repressed or underrepresented will protest and demonstrate. This has historically resulted in changes to policy, and ultimately social acceptance. While many challenges remain, and will always remain, life is getting better. Minority rights have improved. Using census data, Mark Perry at the American Enterprise Institute points out that in 1967 only 9.1% of black households made $75,000 or more (in 2019 dollars). In 2019 29.4% of black households were in that category, a record high. This may still trail behind other racial groups, and much work remains to be done, but the trend is moving in a positive direction.

I have a relative whose father-in-law was gay. He was also the General Counsel for one of the largest public companies in America. Had he been honest about his sexuality, he would have lost his job and found it difficult to find a new one. However, that was decades ago. Today there are openly gay people running for and holding public office, as well as running the largest public company in the world, Apple. Clearly societal norms have evolved, making life better for diverse groups over time. Could the coming election change all that? A Freakonomics podcast earlier this year addressed the importance of the president to daily life. The hypothesis was that because of the separation of powers and the backstop of the courts, the president was not really as important as is often portrayed. Some guests interviewed on the podcast agreed, but others said that because of the increasing popularity of executive actions, the president was still vastly important. History suggests that from an economic and stock market perspective, the choice isn’t so stark. Most of us have seen charts comparing historical stock market returns under Democratic and Republican presidents. Stocks have risen a bit more under Democrats. However, the Republicans are weighed down by the 65% decline in stocks from election day in 1928 until the end of Herbert Hoover’s term in 1932, during the Great Depression.

Dimensional Fund Advisors has an interactive chart at its website showing how stocks performed under each president since Hoover. It shows which party controlled the houses of Congress, as well as some basic economic data. Interestingly, the chart shows that the stock market only declined during the administrations of three presidents: Hoover, Nixon, and George W. Bush. Each coincides with significant bear markets, such as the Great Depression, the bursting of the Nifty Fifty bubble, and the Global Financial Crisis. Does this mean that Republicans are more likely to be responsible for major economic disruptions? Probably not. Business cycles may be modestly influenced by presidential policies, but it is a stretch to think that they alone are responsible for these events. What is most striking about the Dimensional chart is that stocks tend to go up regardless of who occupies the Oval Office. Businesses continue, people strive to earn a living, and the economy grows, despite dire campaign predictions.

There are certainly other issues that are as or even more important than the economy. Yet, historical evidence suggests that on most fronts, we don’t have to worry too much about a dramatic change to our lives regardless of the outcome of the election in November. I’m reminded of Robert Frost’s observation on overreacting: “In three words I can sum up everything I’ve learned about life: it goes on.”

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