History suggests that the lead up to next year’s election and the year thereafter could give rise to a stock market rally
The countdown is on until next year’s US presidential election. Never mind the fact that the Democrats still need to run a primary election, or the impeachment proceedings hanging over President Trump - the market has an eye on November 3, 2020.
As we begin to look ahead to what is sure to be a hotly-contested election, it’s also worth reflecting on how previous elections have shaped the US stock market. The good news is that markets have posted some of their strongest rallies before and after US presidential elections.
Since 1900, the Dow Jones has delivered average returns of 7.6% during years in which the presidential election takes place. Among those 30 instances, the market was higher 70% of the time, with gains typically skewed to the second half of the year.
This record is weighed down by anomalies at the start of the 20th century. In fact, since 1928, there have been just four instances (out of 23) where the S&P 500 fell during an election year. The most recent was 2008 amid the GFC. Before that, it was the 2000 tech bubble.
Most (13) elections since 1928 have involved a sitting president seeking re-election. Only four have lost their bid for re-election (1932, 1976, 1980, 1992), each time immediately after a recession. In re-election years, the S&P 500 has only fallen twice – once after the 1932 recession, and then in 1940, during the Second World War.
This data suggests recessions are a key point in presidential elections. President Trump would be well aware that keeping the US out of recession is key to his own presidential re-election. The Federal Reserve are also being pro-active to stave off the risk of an economic slowdown. Combined, these points could add great support to markets next year.
While some analysts argue that the first year after an election is considered the ‘weakest’ year for markets, a recent trend dispels this as somewhat of a myth.
The first year in each of President Obama’s terms in office were particularly strong. In fact, the Dow Jones bolted 27% higher during the first year of his second term.
Prior to that, markets climbed 25.2% during President George H.W. Bush’s first year. Similarly, the beginning of both of President Clinton’s terms in office saw markets perform strongly, up 19.9% and 35.9% respectively.
Even President Trump was the beneficiary of a strong market during his first year in the Oval Office, where the S&P 500 was up more than 20%.
So while long-term data still points to the post-election year as somewhat of a market ‘hangover’, this is skewed by misleading historical data from the 1800s and early 1900s. Instead, since 1926 the average return in the S&P 500 in the year after an election is 9.9%.
In summarising, it should be noted that past performance is no indicator of future performance. However, US markets have a strong pre and post-election record that might just play out again heading into next year’s presidential election.
Global Growth Portfolio
The portfolio gained 7.7% during November.
Growth was predominantly attributable to the broad strength of our equity holdings across the portfolio. These gains accounted for a 5.7% increase in the Net Asset Value (NAV) of the portfolio compared with the opening balance.
Strong contributions were also recorded in foreign exchange currency, with the USD/AUD increasing from 1.4504 to 1.4784. This movement resulted in a net forex gain of 2% on assets held within the portfolio.
For the second month running, Apple (APPL) and Advanced Micro Devices (AMD) were the leading positions within the portfolio, up 7.4% and 15.4% respectively. Momentum has been building for Apple as optimism builds towards a resolution in the US-China trade war. Meanwhile, AMD is the beneficiary of eager demand for its new products, increasing market share, and upcoming product launches – all of which have analysts raising price targets.
Last month was also a strong month for shares in Alibaba (BABA), which soared 13.2%. In late November the stock completed a secondary listing on the Hong Kong Stock Exchange. It gathered wide support from investors, even jumping as much as 7% on debut. Earlier in the month, Alibaba delivered an earnings beat for Q2 and also set a new sales record for Singles Day, reinforcing our confidence in the quality of the business.
As a hedge, we sold some call options over AMD, Nike (NKE) and Zillow Group (ZG), which, to date have delivered small gains. No other changes were made to the portfolio during November. By the end of the month, unrealised income represented 15.2% of all assets, an increase from 10.5% the month prior.
From here, our attention turns towards the prospect of a late-year Christmas rally, particularly if a phase one trade deal is struck with China and tariffs are rolled back. With that said, given the near-perfect conditions currently priced into the market, and trading volumes likely to drop off, we are carefully managing portfolio risk and also cautious of adding any new positions.
Australian Yield Portfolio
The portfolio gained 2.9% during November, outperforming the ASX 200 which increased by 2.7% across the month.
Most of the portfolio’s gains were driven by an increase in the valuation of shares held, which represented an increase of 2.1% of NAV.
The remaining growth of 0.8% in portfolio NAV came courtesy of dividend income, with several companies trading ex-dividend throughout November. These included ANZ (ANZ), NAB (NAB), Bank of Queensland (BOQ) and Resmed (RMD).
Telstra (TLS) shares were the leading contributor across the month, with the stock rising 10.6%. This came on the back of its 2019 Investor Day, where the company has flagged lower-than-expected operating costs. We believe that cost control will be fundamental for Telstra to continue paying sustainable dividends, so we viewed this update as reassuring news.
Other standout stocks were A2M (A2M) and Xero (XRO), each delivering strong trading results. A2M exceeded forecasts for operating margins, while Xero continues to post significant subscriber and revenue growth. These stocks reinforce our desire for the Australian Yield Portfolio to target not just immediate income opportunities, but also growth opportunities with future dividend potential.
Shares in Baby Bunting (BBN) dragged on the portfolio, falling 15.4%. However, the absence of any company-specific news, as well as a strong run in the stock since mid-August lead us to believe some traders have taken profits. We feel confident that the company’s strong growth profile, including growing dividends, offers lucrative upside on account of the high number of exclusive products it sells, and the numerous competitors that have exited the market.
By the end of the month, 23% of all portfolio assets were cash. Given this is just the second month we have been managing the Australian Yield Portfolio, we believe it is prudent that we take the necessary time to implement our income-oriented investment strategy. Until then, holding a higher level of cash will give us the flexibility required to respond to any new opportunities that emerge throughout December and coming months.