Susan Ziubinski: Hello, this is Susan Ziubinski from Morningstar. Here in the United States, we will be heading to the polls to choose our next president in November. And for now, it looks like the choice will be between current President Joe Biden and former President Donald Trump. Here, we talk with Dan Lefkowitz about what investors can learn from market trends during the previous administration. Dan is a strategist at Morningstar Indexes. long view Podcast.
Hello Dan. Thank you for being here today.
Dan Lefkowitz: Susan, it’s always great to be with you.
Ziubinski: Okay. So we actually took a hard look at the performance of different asset classes over the last four administrations with real data. Viewers can access the survey via the link below this video. We talk very extensively about how stocks and bonds have trended during these various regimes.
Lefkowitz: We looked at the annualized returns of the Morningstar US Market Index, a broad measure of our stocks, as well as the Morningstar US Core Bond Index over the past four administrations. It turns out that stock prices performed best under the Trump administration. It also performed very well under the Obama administration, delivered solid returns under the Biden administration, and performed badly under the George W. Bush administration. Bonds performed best under the Bush administration and worst under the Biden administration. It goes without saying, but I’ll say it anyway. There’s a lot going on, a lot of variables, and understanding the situation is very important.
Ziubinski: Understood. Now, given that both of this year’s presidential candidates have been in office before and very recently, let’s dig a little deeper into market performance before and during the Trump and Biden administrations specifically. Now, as we get closer to the election, we often hear people say, “Oh, there’s going to be more market volatility.” For example, have we seen more volatility than usual in the past two years when elections have taken place, in 2016 and in 2020?
Lefkowitz: We expected more volatility in an election year, but it turns out that’s not necessarily the case. So in 2016 he actually had less volatility than in 2015. Although there was some volatility leading up to the November 2016 election, the biggest market move of 2016 was actually in June, in response to Brexit. It fell when the UK voted to leave the European Union. This surprised and spooked the market, and US markets also saw declines. But even that move wasn’t as big as the Flash Crash of August 2015. Susan, I hope you remember. Actually that wasn’t the case. But it’s amazing how these events, which seemed so important at the time, can be lost. But 2020 was a very volatile year, and that was more because of the pandemic than because of the election. Massive pandemic panic occurred in March 2020 when lockdowns first began, and there were also pandemic-related market-moving events in September, October, and November 2020.
Ziubinski: Let’s talk a little bit about the market dynamics between the Trump and Biden administrations, starting with the Trump administration and his surprise victory in 2016. How did the U.S. stock and bond markets initially react after his victory?
Lefkowitz: There was a large rally in November 2016 that was then called the “Trump Bump.” Digging deeper, it was actually the small-cap value sector of the U.S. stock market that led the way after the election. The biggest perceived beneficiaries of President Trump’s policies of economic growth, tax cuts, deregulation, and infrastructure spending have been economically sensitive, interest rate sensitive, and domestically oriented companies. Now, Big Tech, Trump is not supposed to be a friend of Big Tech, and just like the bond market, tech stocks were actually lagging the market as of November 2016. Bond markets fell on expectations of massive stimulus, inflation and interest rate hikes.
Ziubinski: And what about the international market? How did international markets initially react?
Lefkowitz: Russia rose, Mexico fell. In other words, when the Russian stock market was open for investment, Russian stocks did well after the election. Trump was perceived to be a friend of Russia. And Mexico, if you remember, the big slogan of the election was “build the wall,” and after the election of President Trump, the Mexican stock market and the Mexican peso really fell.
Ziubinski: Now let’s look at the entire term, the entire Trump administration. What happened to the market during this time and up to the end of the period? Were the initial expectations and actions in the market true?
Lefkowitz: No, they didn’t stick around. In fact, in 2017, small-cap stocks, which benefited the most from President Trump’s election, were the worst-performing corner of the style box as measured by our index. In 2017, large-cap stocks led the way in growth. What happened was that many key electoral policy plans, such as infrastructure spending, failed to make progress, and expectations were completely reset. So what we saw throughout the remainder of President Trump’s term was that technology was the best-performing stock sector, which certainly wasn’t what we expected post-election. If you remember, back then we talked about FANG stocks. The acronyms Facebook and Amazon, Netflix and Google were coined in his 2013. These were the pre-election market leaders, and their acronyms have only evolved and grown through President Trump’s term.
Ziubinski: Let’s fast forward a bit and talk about Joe Biden’s 2020 victory. And the same question here. How did domestic and international markets initially react to this victory?
Lefkowitz: Interestingly, small-cap stocks also rose after Biden’s victory in November 2020. However, it is very difficult to distinguish between the impact of election results and the announcement of a coronavirus vaccine. In other words, the coronavirus vaccine came out in November 2020, right after the election. And stocks that are also economically sensitive and have struggled due to the effects of the pandemic and lockdowns rallied. In 2020, we’ve talked a lot about BEACH stocks in reservations, entertainment, airlines, cruises, hotels, and more. These are the biggest losers of the pandemic and rebounded very strongly after the vaccine announcement in November 2020. So small-cap value rose after both Trump and Biden.
Ziubinski: Dan, as we move further into Joe Biden’s term, what happened to the initial expectations? Have we reached an impasse?
Lefkowitz: The story is a little complicated. So small-cap stocks he did very well in 2021. It was the best performing part of the market. 2021 was a really good year overall, both in terms of growth and value. A major crash occurred in 2022. Well, Energy he did very well in 2022 as well. Technology has brought the market down. And then there was the artificial intelligence craze that started at the end of 2022 and continued into 2023. And so far this year, we’ve been talking about the “Magnificent Seven,” leaders in large-scale growth technology. However, under the Biden administration, energy is actually the best-performing sector in the US stock market, which is surprising given his focus on renewable energy, and the energy sector of the stock market is more traditional. oil and gas. But technology has fared very well under the Biden administration.
Ziubinski: Dan, given what we’ve seen so far, is there one candidate that’s better or worse for the market?
Lefkowitz: Susan, my honest answer is “no one knows.” It is very difficult to know how politics will affect the market. And it can be said that politics and elections pose many behavioral pitfalls for investors. There are a lot of emotions involved. Furthermore, it is extremely difficult to predict what policies will be implemented and how the market will react as a result of the election. So, I don’t know.
Ziubinski: After looking at all of this data across four administrations, what do you think are the key takeaways for investors in the 2024 election year?
Lefkowitz: First, elections do not take place in a vacuum. Elections are just one of many variables that constantly interact to influence markets. Second, the initial reaction is not necessarily long-lasting. In the long run, markets will be driven by corporate profits and cash flows rather than by the effects of policy and government. And third, markets are always learning and adapting, so if Trump wins in 2024, the markets will react the same way they did in 2016, or if Biden wins, the markets will react the same way they did in 2020. I don’t think we can simply assume that the will respond. . That’s why the past is not always predictable.
Ziubinski: That’s why I think no matter what season we’re in or what year we’re in, a diversified portfolio is probably the best thing for most people.
Lefkowitz: That is correct. I think there’s an old expression that goes, “Don’t predict, prepare.” I think there’s a lot of wisdom there.
Ziubinski: Good advice, Dan. Thank you for being here today.
Lefkowitz: Thank you, Susan.
Ziubinski: I’m Susan Ziubinski from Morningstar. Thank you for watching.
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