Article

Do US elections matter for stock returns?

October 2024 / 6 minutes

Key points

  • Past data suggests there is not a strong link between the S&P 500’s performance and the politician picked to helm the US economy.
  • Technological advances and company launches appear to have had more long-term influence on the index than election issues of the day.
  • We focus on seeking out exceptional companies, including Novo Nordisk and Stella-Jones, that can deliver outperformance.

Your capital is at risk. 

Listen to this article

This audio has been generated by AI. 

Do elections matter? Of course, they do. Elections can change all sorts of things: how we live, access to healthcare and education, the regulations businesses must abide by and how much money is in our pockets at the month’s end.

However, for equity fund managers, the critical questions are: what do elections mean for stock picking? Do they influence whether the market goes up or down? By how much?

Judging by the time the financial media spends on the US presidential election, the answer to that last question must surely be a lot. At the time of writing, 20 per cent of Bloomberg’s top US news articles concern the vote. Most assume the outcome will have at least some impact on the economy’s direction and investment returns.

This paper will examine the evidence and explain why a selective stock-picking manager can thrive, whatever the political weather.

 

Reviewing returns

At first glance, there’s little to get excited about in the return numbers. The average annual price return for the S&P 500 going back six decades is about 8 per cent. In the year after a presidential election, the number is… just under 9 per cent. In the year prior, it’s about 8 per cent. There is significant volatility year by year, but nothing to suggest these years stand out from any other.

Even volatility isn’t significantly different from the norm in these years: the average standard deviation from the annual price return is about 15 per cent, with the number before an election 16 per cent (ie a little more), and after 13.5 per cent (ie a little less).

Perhaps these figures mask something important. Like a man with his head in an oven and feet in a freezer, averages can give a meaningless assessment.

What about Republicans versus Democrats? It may be tempting to assume low-tax, low-regulation Republicans are a stock market winner, but the data doesn’t show it:

  • The average annual price return during a Republican presidency is about 5 per cent. During a Democratic presidency, it’s 11 per cent.
  • In the year after a Republican victory, the average price return is 3 per cent. After a Democratic win, it’s 15 per cent.

However, these figures are distorted by big one-offs. George W Bush’s election coincided with the dotcom bubble’s burst, leading to a 22 per cent market drop over the year following the result. In the 12 months after Joe Biden’s win, the market surged 38 per cent in a trading environment distorted by the lifting of Covid lockdowns.

 

Challenging assumptions

There seems to be little that can be drawn from this analysis.

That makes sense if we examine what really drives markets – and a bottom-up, stock picker’s portfolios – over the long run. The argument above implicitly implies it is the economy, which in turn is driven by politics. 

But, the relationship between the strength of economic growth and market returns is shaky at best. Between 1900 and 2022, the US’s economy grew more than any other country. However, as a Credit Suisse study illustrates, that didn’t translate into the best stock market returns:

  • The US market returned about an average of 6.5 per cent a year over the period.
  • However, South Africa’s stock market beat it, achieving a 7.2 per cent return despite pedestrian economic growth.
  • When translated into US dollars, the returns of the two countries are about the same. But on this common currency basis, Australia comes out on top.

If you switch the starting point to 1998, the S&P 500 has made an impressive gain, returning just shy of 500 per cent. However, over this timespan, it’s trounced by the Dow Jones Denmark, which returned just over 1,500 per cent in US dollar terms despite slower economic growth.

Of course, starting points matter when making such comparisons. This is a key point: one reason index returns deviate from economic performance is that the former depends on starting valuations, which are a proxy for investor sentiment about a country’s stock market prospects.

However, there are two further reasons. Firstly, much of a stock market’s return is driven by overseas revenues. For the S&P 500 today, international sales are approaching 40 per cent of the total. Secondly, the stock market mainly accounts for large public businesses, ignoring private and smaller companies, let alone government spending.

Therefore, even if we assume that presidents influence economies, they aren’t a decisive factor in driving markets. Which begs the question: what does matter?

The short answer is innovation and entrepreneurship. The stock market is, after all, merely a collection of companies. Furthermore, it tends to be driven by the outsized successes of a few big winners.

 

Long-term perspective

Perhaps the sharpest way to demonstrate this is to take hotly contested issues of the past, contrast them with important technological advances and company launches, and ask what mattered more for long-term stock returns.

Picking a few:

  • In 1948, Americans debated how to navigate the emerging Cold War and domestic economic policy. A year earlier, Bell Labs invented the transistor, setting into motion the chain of innovation that led to silicon chips.
  • In 1952, the Korean War was front of mind. At the same time, IBM introduced the IBM 701, its first scientific computer.
  • In 1968 and 1972, controversy over the Vietnam War raged. Intel was founded in the earlier year, and Atari released Pong in the latter, launching the video game industry.

It’s easy to do this for almost every election. What mattered more in 1976, the fallout from Watergate or Apple’s founding? In 1996, was it the role and size of the federal government or Page and Brin launching Google? Should investors have paid more attention to 2004’s immigration debate or wondered about Facebook’s potential?

In a generation’s time, writers will surely make the same assessment of today.

Debate is as fierce – perhaps fiercer – than it has ever been, and it would be easy to equate the noise and fury with import for stock returns. But when you compare it to the progress companies are making at a fundamental level, you reach a different conclusion.

 

Health and automation game-changers

Politicians may debate the appropriate level of taxation or regulation for already profitable businesses. This can affect discounted cash flows (which some investors use to determine an asset’s current value based on forecasts of how much money it will make in the future). However, for long-term Baillie Gifford holding Novo Nordisk, which derives most of its revenue from the US, such decisions won’t meaningfully impact long-run stock returns.

What will matter is the revolutionary potential of the company’s new anti-obesity drugs. If Novo Nordisk continues improving efficacy, decreasing side effects and developing exciting therapies, then its future will be bright.

Novo Nordisk is investing deeply in manufacturing its anti-obesity drug Wegovy to meet demand. 

©Michael Siluk / Universal Images Group

Baillie Gifford first invested in the firm nearly 24 years ago. Our analysis has focused on its innovative culture, its impressive collection of accumulated diabetes and obesity knowledge stretching back over 100 years, and the enormous size of this market. These considerations remain relevant, not who sits in the White House.

Fists may be shaken during the ever-polarised immigration debate. The supply and cost of labour are relevant considerations for many businesses. However, they should be seen in the context of companies fundamentally changing how we work.

Aurora, for example, is pioneering autonomous trucks. Adapted vehicles can drive through the night without risk of exhaustion and in the most fuel-efficient manner. As this technology matures, the implications are profound for the efficiency and safety of our transport networks. Regulations may take time to catch up, but the long-term result is as inevitable as an Aurora vehicle reaching its destination.

 

Infrastructure outliers

Some sectors seem more susceptible to politics than others. Finance, for instance, is heavily regulated, and defence companies are reliant on government contracts.

Infrastructure also counts politics as its ultimate source of demand. But here, investors with an eye for long-term trends and the dynamics that power real change can profit without overexposing themselves to risks caused by shifts in the political wind.

Policy often determines the exact dollar amounts and timings regarding infrastructure investments. However, that policy is often the product of unignorable long-term trends.

The US Society of Civil Engineers gives American infrastructure a C- rating. Shortcomings are apparent to citizens whenever they’re stuck in traffic or without power for days after a storm. And that’s before the impact of a changing climate.

Part of the reason infrastructure investment is a broadly bipartisan issue today is because the effects of its deterioration are widespread. Things will change, no matter who’s in the Oval Office. Still, it pays to be selective and to look for companies with the best potential for outperformance.

Stella-Jones makes pressure-treated wooden products, including utility poles for the US’s power grid.

Where does burgeoning, long-term demand meet other stock-specific attributes? One answer is Stella-Jones, a maker of telegraph poles, among other wooden products. Stella controls most of North America’s supply, making it vital to upgrading and maintaining power and telecommunication networks.

Even if demand for its poles moderated to only a sustainable replacement level, there would be a shortage. Moreover, supply can only expand slowly, so Stella-Jones can charge good prices.

The cherry on top is a stock market currently unwilling to account for much growth, resulting in a low valuation. The potential for a demand surprise coupled with supply constraints creates the potential for strong returns. Politics may – should – be helpful, but we don’t need it to make money for our clients.

 

Our advantage 

We have no special insight into who will win in November or any other election. But we do regarding revolutionary medicine, autonomous trucks and telegraph poles.

Indeed, it is invariably much easier to step back and ask: what’s really changing? Where are the fires of innovation and entrepreneurship burning the brightest?

The selective stock picker can follow that light to outsized returns and leave the political crystal ball-gazing to others.

Risk Factors

The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in October 2024 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.

All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.

The images used in this communication are for illustrative purposes only.

 

Important Information

Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.

Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.

Persons resident or domiciled outside the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.

 

Financial Intermediaries

This communication is suitable for use of financial intermediaries. Financial intermediaries are solely responsible for any further distribution and Baillie Gifford takes no responsibility for the reliance on this document by any other person who did not receive this document directly from Baillie Gifford.

 

Europe

Baillie Gifford Investment Management (Europe) Ltd (BGE) is authorised by the Central Bank of Ireland as an AIFM under the AIFM Regulations and as a UCITS management company under the UCITS Regulation. BGE also has regulatory permissions to perform Individual Portfolio Management activities. BGE provides investment management and advisory services to European (excluding UK) segregated clients. BGE has been appointed as UCITS management company to the following UCITS umbrella company; Baillie Gifford Worldwide Funds plc. BGE is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co. Baillie Gifford Overseas Limited and Baillie Gifford & Co are authorised and regulated in the UK by the Financial Conduct Authority.

 

China

Baillie Gifford Investment Management (Shanghai) Limited 柏基投资管理(上海)有限公司(‘BGIMS’) is wholly owned by Baillie Gifford Overseas Limited and may provide investment research to the Baillie Gifford Group pursuant to applicable laws.  BGIMS is incorporated in Shanghai in the People’s Republic of China (‘PRC’) as a wholly foreign-owned limited liability company with a unified social credit code of 91310000MA1FL6KQ30. BGIMS is a registered Private Fund Manager with the Asset Management Association of China (‘AMAC’) and manages private security investment fund in the PRC, with a registration code of P1071226.

Baillie Gifford Overseas Investment Fund Management (Shanghai) Limited柏基海外投资基金管理(上海)有限公司(‘BGQS’) is a wholly owned subsidiary of BGIMS incorporated in Shanghai as a limited liability company with its unified social credit code of 91310000MA1FL7JFXQ. BGQS is a registered Private Fund Manager with AMAC with a registration code of P1071708. BGQS has been approved by Shanghai Municipal Financial Regulatory Bureau for the Qualified Domestic Limited Partners (QDLP) Pilot Program, under which it may raise funds from PRC investors for making overseas investments.

 

Hong Kong

Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 is wholly owned by Baillie Gifford Overseas Limited and holds a Type 1 license from the Securities & Futures Commission of Hong Kong to market and distribute Baillie Gifford’s range of collective investment schemes to professional investors in Hong Kong. Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 can be contacted at Suites 2713-2715, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. Telephone +852 3756 5700.

 

South Korea

Baillie Gifford Overseas Limited is licensed with the Financial Services Commission in South Korea as a cross border Discretionary Investment Manager and Non-discretionary Investment Adviser.

 

Japan

Mitsubishi UFJ Baillie Gifford Asset Management Limited (‘MUBGAM’) is a joint venture company between Mitsubishi UFJ Trust & Banking Corporation and Baillie Gifford Overseas Limited. MUBGAM is authorised and regulated by the Financial Conduct Authority.

 

Australia

Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth) and holds Foreign Australian Financial Services Licence No 528911. This material is provided to you on the basis that you are a “wholesale client” within the meaning of section 761G of the Corporations Act 2001 (Cth) (“Corporations Act”). Please advise Baillie Gifford Overseas Limited immediately if you are not a wholesale client. In no circumstances may this material be made available to a “retail client” within the meaning of section 761G of the Corporations Act.

This material contains general information only. It does not take into account any person’s objectives, financial situation or needs.

 

South Africa

Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Sector Conduct Authority in South Africa.

 

North America

Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005 and is registered with the SEC. It is the legal entity through which Baillie Gifford Overseas Limited provides client service and marketing functions in North America. Baillie Gifford Overseas Limited is registered with the SEC in the United States of America.

The Manager is not resident in Canada, its head office and principal place of business is in Edinburgh, Scotland. Baillie Gifford Overseas Limited is regulated in Canada as a portfolio manager and exempt market dealer with the Ontario Securities Commission ('OSC'). Its portfolio manager licence is currently passported into Alberta, Quebec, Saskatchewan, Manitoba and Newfoundland & Labrador whereas the exempt market dealer licence is passported across all Canadian provinces and territories. Baillie Gifford International LLC is regulated by the OSC as an exempt market and its licence is passported across all Canadian provinces and territories. Baillie Gifford Investment Management (Europe) Limited (‘BGE’) relies on the International Investment Fund Manager Exemption in the provinces of Ontario and Quebec.

 

Israel

Baillie Gifford Overseas Limited is not licensed under Israel’s Regulation of Investment Advising, Investment Marketing and Portfolio Management Law, 5755-1995 (the Advice Law) and does not carry insurance pursuant to the Advice Law. This material is only intended for those categories of Israeli residents who are qualified clients listed on the First Addendum to the Advice Law.

 

Singapore

Baillie Gifford Asia (Singapore) Private Limited is wholly owned by Baillie Gifford Overseas Limited and is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence to conduct fund management activities for institutional investors and accredited investors in Singapore. Baillie Gifford Overseas Limited, as a foreign related corporation of Baillie Gifford Asia (Singapore) Private Limited, has entered into a cross-border business arrangement with Baillie Gifford Asia (Singapore) Private Limited, and shall be relying upon the exemption under regulation 4 of the Securities and Futures (Exemption for Cross-Border Arrangements) (Foreign Related Corporations) Regulations 2021 which enables both Baillie Gifford Overseas Limited and Baillie Gifford Asia (Singapore) Private Limited to market the full range of segregated mandate services to institutional investors and accredited investors in Singapore.

 

121402 10050384

 

About the author