On presidents, the stock market, and the big picture for investors 🖼

Plus a charted review of the macro crosscurrents 🔀

Jul 21, 2024

📈 Stocks set new all-time highs, with the S&P 500 setting a record intraday high of 5,669.67 and a record closing high of 5,667.20 on Tuesday. For the week, the S&P fell 2% to end at 5,505. The index is now up 15.4% year to date and up 53.9% from its October 12, 2022 closing low of 3,577.03. For more on the stock market moves, read: Keep your stock market seat belts fastened 🎢

Is a U.S. president from one political party better for the stock market than one from another party?

If only things were that simple.

The answer to this question often varies depending on whom you ask. And most answers will come with all sorts of caveats including: “Well, this president inherited the policies of the last president” or “That president’s term was affected by an exogenous shock” or “Does the president’s party control Congress?” or “Are we measuring from Election Day or Inauguration Day?” and so on.

Here’s my answer: History suggests that a U.S. president’s political slant may not be as important for stock market performance as you might assume.

Consider this simple chart from Truist’s Keith Lerner. It’s the trajectory of the S&P 500 since 1948 with periods shaded depending on the President’s political party. There aren’t any obvious patterns that jump out — except for the fact that the market spends a lot of time trending higher.

The stock market usually goes up. (Source: Truist)

“Markets have presented opportunities and risks under both political parties,” Lerner wrote in a July 2 note. “Elections matter, but it’s important not to look at them in isolation. The business cycle matters, as do valuations, geopolitics, monetary policy, and other factors.“

Indeed, the person who occupies the White House is just one of many variables investors should consider when putting money to work in the stock market.

In case you’re looking for a more granular look at what stocks did under each President, Carson Group’s Ryan Detrick has you covered.

“Stocks historically tend to gain regardless of party.” (Source: Carson Group)

“What matters more is how the economy, profits, inflation, and Fed policy all line up, not who is in the White House,“ Detrick wrote.

If you must know, you will find that historically presidents from one party have been associated with better returns than those from another. Here’s Schwab’s Liz Ann Sonders and Kevin Gordon: “Covering the modern period for the S&P 500, investing only when a Republican was in the White House, a $10K initial investment in 1961 would have grown to more than $102K by 2023. On the other hand, the same $10K initial investment would have grown to more than $500K, investing only when a Democrat was in the White House.“

Stay invested ⌛️

So is the move to only have money in the market when the president is a Democrat? For investors looking to build wealth over time, the answer is actually no.

“The real moral of the story is told with the final bar [in the chart below],” Sonders and Gordon wrote. “The same $10K initially invested in 1961 would have grown to more than $5.1M by just staying invested, without regard for the political party in power.”

Staying invested has been the move. (Source: Schwab)

As they say, time in the market beats timing the market.

The big picture 🖼️

You don’t have to look very far back in history to see a president you didn’t vote for or wouldn’t have voted for. And odds are, the stock market performed pretty well during his term.

To be clear, of course it matters who is president of the United States: It has an immediate impact on sentiment, could have short-term and long-term social implications, and may even move the needle on the potential for economic growth.

But from a long-term investor’s perspective1, the person who occupies the Oval Office has an arguably marginal impact on the already existing forces driving the markets.

I personally think part of why that’s the case is that everyone wants things to be better regardless of real or perceived challenges. We all want better lives for ourselves and those we love. More often than not, this involves owning goods and accessing services. Consumers and businesses constantly demand more and better things, which incentivizes entrepreneurs and innovators to endlessly develop and deliver better goods and services.

The winners in business get bigger as their revenue grows. Some get big enough to be listed in the stock market. In this process, living standards improve, the economy grows, and earnings grow. Furthermore, earnings drive stock prices.

Where the populace disagrees is how we go about this pursuit, and how we balance it against our other needs and wants. And in turn, these disagreements have us voting in different directions.

Depending on who becomes president, one group will feel more challenged than the other. And yes, some companies and industries may do better than others.

But regardless of who ends up in the White House, it seems that everyone will continue this pursuit of wanting things to be better. It’s what we all have in common that moves the economy forward and drives markets higher.

At the end of the day, life seems to go on.

At least that’s what history suggests.

Related from TKer:

Reviewing the macro crosscurrents 🔀

There were a few notable data points and macroeconomic developments from last week to consider:

🛍️ Shopping stabilizes near record levels. Retail sales inched lower in June to $704.3 billion.

Key categories including online, building materials, health and personal care, furniture, clothes, and electronics grew. Gas stations led weakness, falling 3.0%. Motor vehicle and parts sales declined by 2.0%.

The print was more evidence that the economy has gone from very hot to pretty good.

For more on the consumer, read: There's more to the story than 'excess savings are gone' 🤔 and The US economy is now less ‘coiled’ 📈

💳 Card spending data is mixed. From JPMorgan: “As of 08 Jul 2024, our Chase Consumer Card spending data (unadjusted) was 0.3% above the same day last year. Based on the Chase Consumer Card data through 08 Jul 2024, our estimate of the U.S. Census July control measure of retail sales m/m is 0.15%.“

From Bank of America: “Total card spending per HH was down 1.6% y/y in the week ending Jul 13, according to BAC aggregated credit & debit card data. Retail ex auto spending per HH came in at -3.0% y/y in the week ending Jul 13. The drop compared to last week was likely at least partly due to the impact of Hurricane Beryl.”

For more on consumer finances, read: Unsettling stats about consumer health are missing the bigger picture 💵

💼 Unemployment claims rise. Initial claims for unemployment benefits jumped to 243,000 during the week ending July 13, up from 223,000 the week prior. And while recent prints remains above the September 2022 low of 187,000, they continue to trend at levels historically associated with economic growth.

For more, read: Labor market: How cool will it get? 🥶

🛠️ Industrial activity rises. Industrial production activity in June increased 0.6% from the prior month. Manufacturing output rose 0.4%.

For more on activity stabilizing as inflation cools, read: The bullish 'goldilocks' soft landing scenario that everyone wants 😀

🏠 Homebuilder sentiment falls. From the NAHB’s Carl Harris: “While buyers appear to be waiting for lower interest rates, the six-month sales expectation for builders moved higher, indicating that builders expect mortgage rates to edge lower later this year as inflation data are showing signs of easing.”

🔨 New home construction rises. Housing starts rose 3.0% in June to an annualized rate of 1.35 million units, according to the Census Bureau. Building permits grew 3.4% to an annualized rate of 1.45 million units.

For more on housing, read: The U.S. housing market has gone cold 🥶

🏠 Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.77% from 6.89% the week prior. From Freddie Mac: “Mortgage rates are headed in the right direction and the economy remains resilient, two positive incremental signs for the housing market. However, homebuyers have yet to respond to lower rates, as purchase application demand is still roughly 5 percent below Spring, when rates were approximately the same. This is not uncommon: sometimes as rates decline, demand weakens, and the apparent paradox is driven by buyers making sure rates don’t decline further before they decide to purchase.”

There are 146 million housing units in the U.S., of which 86 million are owner-occupied and 39% of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.

For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖

⛽️ Gas prices fall. From AAA: “The national average for a gallon of gas fell four cents to $3.50 since last week. The likely cause is the terrible demand number for gasoline, as folks may be curtailing driving amid sizzling summer temperatures.”

For more on energy prices, read: Higher oil prices meant something different in the past 🛢️

🏢 Offices are still relatively empty. From Kastle Systems: “The weekly average peak remained unchanged at 56% occupancy, this past week on Wednesday. Friday — the average low day — only reached 15.1%, compared to 33.5% the previous week. The July 5th post-holiday dip follows a similar trend as in previous years. Houston experienced an unusually low average low day on Monday at just 4.7% occupancy — less than half that of any other city. This was likely due to extreme weather and blackouts from Hurricane Beryl.”

For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢

😬 This is the stuff pros are worried about. According to BofA’s May Global Fund Manager Survey, fund managers identified “geopolitical conflict” as the “biggest tail risk.”

The truth is we’re always worried about something. That’s just the nature of investing.

For more on risks, read: Sorry, but uncertainty will always be high 😰, Two times when uncertainty seemed low and confidence was high 🌈, and What keeps me up at night 😵‍💫

📈 Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.7% rate in Q2.

For more on economic growth, read: Economic growth: Slowdown, recession, or something else? 🇺🇸

Putting it all together 🤔

We continue to get evidence that we are experiencing a bullish “Goldilocks” soft landing scenario where inflation cools to manageable levels without the economy having to sink into recession.

This comes as the Federal Reserve continues to employ very tight monetary policy in its ongoing effort to get inflation under control. While it’s true that the Fed has taken a less hawkish tone in 2023 and 2024 than in 2022, and that most economists agree that the final interest rate hike of the cycle has either already happened, inflation still has to stay cool for a little while before the central bank is comfortable with price stability.

So we should expect the central bank to keep monetary policy tight, which means we should be prepared for relatively tight financial conditions (e.g., higher interest rates, tighter lending standards, and lower stock valuations) to linger. All this means monetary policy will be unfriendly to markets for the time being, and the risk the economy slips into a recession will be relatively elevated.

At the same time, we also know that stocks are discounting mechanisms — meaning that prices will have bottomed before the Fed signals a major dovish turn in monetary policy.

Also, it’s important to remember that while recession risks may be elevated, consumers are coming from a very strong financial position. Unemployed people are getting jobs, and those with jobs are getting raises.

Similarly, business finances are healthy as many corporations locked in low interest rates on their debt in recent years. Even as the threat of higher debt servicing costs looms, elevated profit margins give corporations room to absorb higher costs.

At this point, any downturn is unlikely to turn into economic calamity given that the financial health of consumers and businesses remains very strong.

And as always, long-term investors should remember that recessions and bear markets are just part of the deal when you enter the stock market with the aim of generating long-term returns. While markets have recently had some bumpy years, the long-run outlook for stocks remains positive.

For more on how the macro story is evolving, check out the the previous TKer macro crosscurrents »

TKer’s best insights about the stock market 📈

Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.

10 truths about the stock market 📈

The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.

The makeup of the S&P 500 is constantly changing 🔀

Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.

(Source: S&P Dow Jones indices via TKer)

The key driver of stock prices: Earnings💰

For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.

Stomach-churning stock market sell-offs are normal🎢

Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.

High and rising interest rates don't spell doom for stocks👍

Generally speaking, rising interest rates are not welcome news for the economy and the stock market. They represent higher financing costs for businesses and consumers. All other things being equal, rising rates represent a hindrance to growth. However, the world is complicated, and this narrative comes with a lot of nuance. One big counterintuitive piece to this narrative is that historically, stocks have actually performed well during periods of rising interest rates.

How stocks performed when the yield curve inverted ⚠️

There’ve been lots of talk about the “yield curve inversion,” with media outlets playing up that this bond market phenomenon may be signaling a recession. Admittedly, yield curve inversions have a pretty good track record of being followed by recessions, and recessions usually come with significant market sell-offs. But experts also caution against concluding that inverted yield curves are bulletproof leading indicators.

How the stock market performed around recessions 📉📈

Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.

In the stock market, time pays ⏳

Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.

What a strong dollar means for stocks 👑

While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.

Economy ≠ Stock Market 🤷‍♂️

The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.

Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐

…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.

Peter Lynch made a remarkably prescient market observation in 1994 🎯

Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.

Warren Buffett's 'fourth law of motion' 📉

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.

Most pros can’t beat the market 🥊

According to S&P Dow Jones Indices (SPDJI), 59.7% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2023. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 79.8% underperformed. Over a 10-year period, 87.4% underperformed. And over a 20-year period, 93% underperformed. This 2023 performance follows 13 consecutive years in which the majority of fund managers in this category have lagged the index.

Proof that 'past performance is no guarantee of future results' 📊

S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 334 large-cap equity funds were in the top half of performance in 2021. Of those funds, 58.7% came in the top half again in 2022. But just 6.9% were able to extend that streak through 2023. If you set the bar even higher and consider those in the top quartile of performance, just 20.1% of 164 large-cap funds remained in the top quartile in 2022. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2023.

The odds are stacked against stock pickers 🎲

Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.

This is a reminder that there’s multiple ways of looking at the exact same economy.

TKer by Sam Ro