Portfolio Manager Marc Pinto explains why equity markets have historically tended to be strong during an election year, particularly when there is an incumbent candidate. He also discusses how stocks are reacting to day-to-day changes in the polls and shares his views on what we could expect given the potential outcome.

Key Takeaways

  • In the coming months, we expect the stock market’s focus on the election to intensify as the Democratic primary season progresses.
  • Should one of the more progressive candidates win the nomination, we expect more upheaval in the markets, particularly in health care and financial services.
  • While short-term macro events clearly have the potential to destabilize stocks, we think companies with sustainable revenues and cash flow should have the durability to push through choppy markets.

Marc Pinto: Since 1928, the stock market has only been down four times in an election year: 1932, when we had a depression, 1940, when we had a war starting, 2000, when we had the tech bubble bursting, and then 2008, when we were in the financial crisis. So, markets typically are strong leading into an election year. And when you think about it, that makes sense because often when there is an incumbent involved, which is the case this year, the president will generally do things to stimulate the economy and hopefully stimulate the markets to bolster his or her chances of getting reelected.

I definitely think the markets are reacting, you know, really to the day-to-day changes in the polls among the Democratic primary contestants. I think the market perception is that the President is the most friendly to the market, politics aside. And the second-best alternative would be one of the moderates coming from the Democratic party, whether it is Vice President [Joseph] Biden or Mayor [Michael] Bloomberg. Clearly, if [Sen.] Elizabeth Warren or [Sen.] Bernie Sanders were to be nominated, their election, I think, would cause a lot of upheaval in the markets. Not to say that at the end of the day one of the Democratic candidates’ agenda would be in the long term bad, but the near-term market reaction would probably not be good.

I think sectors that will be influenced by the election specifically are health care and financial services. In the case of healthcare, Medicare for All would no doubt put strict price controls on prescription drugs; in its most extreme form, [it] would completely eliminate the managed care industry. So, we have seen in the case of health care, when Sanders or Warren are gaining in the polls, we have seen the health care sector underperform. And I would say the same is true about financial services. Even though there was a lot of regulation and controls put on the financial services industry as a whole, particularly the banks post-2008, I think there is a feeling among, again, the more progressive faction within the Democratic party, that more controls and restraints are necessary.

As we get further along the primary season, we are going to see, I think, much more attention paid to the election, and potentially as we head into Super Tuesday, we will know within one or two candidates who is going to be the Democratic nominee. Then the market will start to really focus on whether it is potentially Biden or Sanders or one of the other contestants.

From an investment standpoint, our focus is on individual companies that are strong in their industries and their sectors and are creating sustainable revenues and cash flow. And while macro events can, in the short term destabilize some of those stories, we think a lot of our ideas really have the durability to push through in choppy markets and uncertain economic and political times.

Note: Unless otherwise indicated, the source for all data is Janus Henderson Investors as of the date published. The opinions and views expressed are as of the date published and are subject to change without notice.