Do the US Elections Matter for Investors?

Pundits across the political spectrum say the health of the US economy and stock market hangs in the balance of this year’s presidential election. We found that when it comes to driving the stock market, politics actually takes a back seat.

At one extreme, investors on the right assert that four more years of the current administration will lead to a double-dip recession and a stock market crash. Investors on the left warn that proposals from the right are a rehash of the policies that led to the worst recession since the Great Depression.

But when you push aside the rhetoric, what are the actual facts?

It is certainly true that specific legislation matters for investors, especially for bottom-up portfolio managers. For example, the US ethanol policy, and the related 50 million acres of corn planted each year, could mean that a reduction in subsidies would meaningfully lower grain prices, potentially affecting agricultural companies. More directly, defense appropriations impact aircraft manufacturers.

But does party leadership drive stock-market returns? And—for the nervous investor pondering crucial asset-allocation decisions—should political affiliation lead your expectations for investment returns?

To answer this question, we looked at the empirical relationships between the party in the White House and the stock market, as well as the economy, over decades. We also examined tax rates and the stock market. While pundits can always find anecdotal episodes to support either side of the aisle, our research delivered an answer that’s completely nonpartisan.

First, we asked if the party in the White House is related to either stock-market performance or economic growth. The evidence is surprising but clear: the stock market has risen and declined under both parties from 1939 to 2011, as the first display, below, shows. The correlation between political party and the S&P 500 is insignificant at +0.09.  Similarly, the correlation between GDP growth and the White House is 0.25, a weak statistical relationship at best.

No Correlation Between Party in White House and Stock Market Returns

Then we examined the relationship between long-term capital gains tax rates and stock market returns, using the average effective capital gains tax rate and the annual performance of the S&P 500 Index from 1954 to 2008. Simply put, there is no visible relationship between the two series, as the second display, below, shows. The statistical correlation of 0.12 is not significant.

Tax Rates and Stock Market Returns Are Uncorrelated

For example, the 1986 tax legislation increased effective capital gains tax rates from 16% to 22%. As a result, that year, capital gains as a percentage of GDP rose from 4.1% to 7.4%, but the following year the proportion fell to 3.1%—in line with the long-run average of 3.2%. We also examined the relationship between top marginal tax rates and the stock market from 1939 to 2011; the correlation was even weaker, at 0.06. 

So, for investors broadly, it’s hard to identify any long-term linkage between political parties and the markets or tax legislation. That doesn’t mean policy is irrelevant: we do believe Washington matters for investors when there is a clear relationship between specific legislation and company earnings. But, as growth investors determined to identify differentiated companies with strong, lasting competitive advantages, we don’t think that election fever—and the prospects of victory for either candidate—should drive our stock selection.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Frank Caruso, CFA

Chief Investment Officer—US Growth Equities
Frank Caruso is a Senior Vice President and Chief Investment Officer of US Growth Equities, a position he has held since 2012. In this capacity, he oversees three services: US Large Cap Growth, US Core Opportunities and US Growth & Income. Caruso has been Team Leader of US Growth since 2008 and Team Leader of US Growth & Income since 2004. From 1995 to 2004, he served as a Growth & Income portfolio manager. Caruso joined the firm in 1993, when it acquired Shields Asset Management, where he had been director of Equities. Previously, he was a managing director and senior member of the Investment Policy Committee at Shearson Lehman Advisors, as well as CIO for Shearson Lehman Asset Management’s Directions and Capital Management businesses. Caruso was also formerly the lead portfolio manager for Shearson’s family of growth and income mutual funds. He holds a BA in business economics from the State University of New York, Oneonta, and is a member of the New York Society of Security Analysts and the CFA Institute. He is a CFA charterholder. Location: New York

Robert Brown

Senior Portfolio Manager—Equity Strategies
Robert Brown is a Senior Portfolio Manager for AllianceBernstein Equity Strategies. He joined the firm in 2007, having previously served as managing director and head of equity research for Nomura Securities International. Prior to that, Brown worked at Morgan Stanley in various senior leadership roles, in both Tokyo and New York; his last position there was executive director in equity research, where he had responsibility for the Global Macro Research team, including global economics, equity strategy and currency research. Earlier in his career, Brown was an economist at Bankers Trust in New York. He holds a BA in economics and an MA in international economics from Brandeis University, with joint course work in econometrics at the Université catholique de Louvain in Belgium. Location: New York

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