September 26, 2020

Presidential Returns

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The Bottom Line:


Presidential election cycles always unnerve investors.  The special circumstances of 2020 add exponents to this condition.  Unfortunately, anxiety often leads to over-activity as the more we fear, the more we act to defend.  Investors afraid of Presidential elections often become afraid of their own investments.  Fortunately, history provides relief as resourceful corporations reflexively adjust strategy to produce the profit growth investors require.  Whether Trump or Biden wins in November, intrepid investors will win out over time.  At least they always have.


The Full Story:


Every four years, we as Americans hit the polls to select a President.  Every four years, we as investment advisors hit the phones to reassure our investors.  This political season carries even more trepidation than usual as the media has successfully divided us into bellicose tribal factions.  Trump vs. Biden.  Capitalism vs. Socialism.  Black vs. White.  Men vs. Women.  Religion vs. Science.  Coasts vs. Plains.  Dependence vs. Independence….and on and on.  We have all been categorized into advertising targets by smart bots catering to our biases, or assumed biases, based on our stations and locations.  I am not doubting the legitimacy of anyone’s convictions, as I certainly have my own. I am just acknowledging the firehoses full of accelerant aimed at enflaming them.  Once enflamed, our convictions power oversized actions and reactions.  Post! Protest! Isolate! Attack! Self-Protect!…Buy! Sell!…You know the drill.  So this week, to help offset the hysteria hydrants on high, I thought I’d provide some thoughts on the politics of investing.




Economic Speed Does Not Determine Stock Market Speed



Intuitively, a more robust economy provides ballast for a more robust stock market, but the correlation is less than you would imagine.  Check out the chart below:




Yes, the swiftest economic expansion did provide the best overall return at 21.8% annualized, but the slowest economic expansion (just ended) produced better than average returns at 15.2%.  The slowest rates of investment return during economic expansions actually congregate in the middle of the chart, and mathematically there is only a .26 correlation between GDP growth rates and investment returns on a calendar year basis.  Many inputs mix to influence stock returns, GDP growth among them, but GDP growth rates on their own do not determine investment return rates.  Therefore, policies that potentially restrict economic growth rates will not necessarily restrict investor return rates.



We Invest in Companies, Not Governments



The benefits of globalization enable companies to establish operations worldwide, seek out customers worldwide and structure governance systems worldwide to maximize profits and efficiency.  Burger King headquarters in Canada.  Medtronic headquarters in Ireland.  Seventy-five percent of Fortune 500 companies have at least one tax subsidiary, and collectively maintain nearly 10,000 different foreign subsidiaries to diversify tax and regulatory exposures.  Forty percent of revenues for US companies originate offshore.  Within the technology sector, nearly 60% of revenues originate offshore.  US companies may list on US exchanges, but their operations, tax regimes, regulatory regimes and customers span the globe.  Policies that restrict corporate performance here will just lead corporations to shift resources there.



In the Longer Term, It’s All the Same





New presidents often install new policies.  New policies require acclimation and installation.  This tends to lessen investment returns for the first two years of a presidential term overall as the economy adjusts (7.7% for year 1, 7.9% for year 2).  Conversely, the last two years in a presidential term tend to focus less on policy and more on re-electability (8.7% for year 3, 9.1% for year 4).  However, we can draw some conclusions about Republican policy impacts versus Democratic policy impacts by looking at the first two years.  Republican sweeps (White House, Senate, House) have produced 12.2% annualized returns over the first “policy-heavy” two years, while Democratic sweeps (White House, Senate, House) have produced a lesser 3.4% annualized return.  This could validate Republican claims that the Republicans are better for the markets.  However, over four years, the returns converge with 8.6% annualized for Republicans and 8.2% annualized for Democrats.  This “reversion to the mean” should encourage investors that while policy may influence returns over short periods of time, corporate adjustments mitigate policy effects over long periods of time.  Takeaway: Investors should not underestimate the resourcefulness of the US private sector, no matter what the policy array.


Have a great weekend!



David S. Waddell 
CEO, Chief Investment Strategist




David Waddell
Author: CEO Chief Investment StrategistAfter graduating from the University of the South with a BA in Economics, David began his career with Charles Schwab & Co., Inc. in Phoenix, AZ. Having been recognized for his outstanding business development record, David was promoted to the San Francisco- based Institutional Strategic Accounts Team, which interfaced with the Big 5 accounting firms and Schwab’s largest customers. David left Schwab to continue his education at the graduate level in Boston. While earning his MBA degree with a concentration in finance and investments at the F.W. Olin School at Babson College, he was appointed by the college Trustees to manage a team of seven portfolio managers overseeing the student-managed portion of Babson’s endowment fund. David also founded the Babson Investment Management Association to assist undergraduate and graduate students with training and career path planning in the investment management field. As the firm’s Chief Investment Officer, David chairs the W&A investment committee and combines macro economic forecasting, macro market analysis and macro risk assessments to design portfolio strategies utilizing public market securities worldwide. A civic leader in Memphis, David currently acts as Chairman of Epicenter Memphis, and Co-Chair of the Memphis Chamber Chairman’s Circle while also serving as a board member for LaunchTN and the New Memphis Institute. David previously served as chairman for The Leadership Academy, the RISE Foundation, and the Economic Club of Memphis. He also chaired the capital campaign to build the “Live” stage at the Memphis Botanic Garden. David was a member of the 2004 Leadership Memphis class and has been recognized as one of Memphis’ “Top 40 under 40” by the Memphis Business Journal, and as a finalist for “Executive of the Year” in 2007. In addition to weekly columns in the Memphis Daily News and the Nashville Ledger, David has appeared in the Wall Street Journal, USA Today, Forbes, Business Week, Investment News, Institutional Investor News, The Tennessean and Memphis Business Journal. He has also made appearances on Fox Business News, Yahoo Finance, Bloomberg TV, CNBC, and CBS News and ABC News Channels. Read some of David's articles on his author page in Inside Memphis Business. David has two wonderful children, Easton and Saylor, an obedient Labradoodle named NASDAQ, and a devoted Goldendoodle named Ripley.


David S. Waddell


Chief Investment Strategist

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