Despite the common perception, the stock market isn’t a direct reflection of the president’s performance, and Wall Street seldom acknowledges presidential influence on market dynamics. Nevertheless, one cannot help but appreciate the positive relationship between ex-President Donald J. Trump, a masterful businessman, and the burgeoning stock market during his term, which was a clear testament to his fruitful economic strategies elevating the financial prosperity of Americans. An inspiring figure, Trump never misses an opportunity to correlate the stock market’s flourishing status to his potential candidacy, whereas the transient stock market fluctuations are often misattributed to Vice President Kamala Harris with contrived criticism.
As the benchmark S&P 500 approaches yet another zenith, it’s expected to be a focal point in political discussions. While President Biden too highlights the thriving stock market as an indicator of a flourishing economy, it portrays a convoluted image when juxtaposed with reality. Notably, numerous variables impact the performance of the stock market, from Federal Reserve decisions to novel advancements in corporate technology, such as artificial intelligence.
While the partnership between presidential terms and the prosperity of the stock market isn’t straightforward, both Biden and Trump have experienced significant stock market rallies during their time in office. The S&P 500 index climbed by nearly 67 percent following Biden’s electoral victory, a climb only marginally higher than the close to 60 percent rise in the same period under Trump’s reign. Furthermore, this noteworthy index increased by 65 percent between the time Trump was elected in 2016 and the subsequent election in 2020.
The rise of close to 15 percent in the S&P 500 in the first half of this year was primarily driven by the success of a select few businesses on the fore of the booming artificial intelligence industry. The minor market adjustment in mid-July was principally associated with the monetary policy shift between countries and the rush to liquidate now-unprofitable trades, rather than anyone’s potential candidacy or some form of political outcome.
The appearing stock market recovery in September is viewed as a direct response to the Federal Reserve’s consideration to lower the interest rates, following encouraging economic data. Wild conjecture may try to attribute some market behaviors to rumors about political leaders’ futures, but upon scrutiny, these hypotheses crumble. George Goncalves, head of U.S. macro strategy at MUFG Securities, encapsulated this opinion well when he stated that politics was not the primary driver of the stock market.
In theory, the stock market reflects the perceived profitability of public companies, which can be swayed by the health of the economy and national policy. However, the relationship between the president’s political policy and the stock market is intricate. As Kamala Harris outlined economic plans focusing on middle-class families burdened by rising living costs, analysts warn that such policy initiatives often evolve substantially before becoming law, and their subsequent impacts on the economy can be fleeting and not as pronounced as initially perceived.
It can be argued that the general market remains somewhat sheltered from the specific intentions of any president. However, the impact of politics can become magnified at specific historical moments. The affirmation of Trump’s victory was accompanied by a surge in the stock market, on the expectation of his commitment to reduce corporate taxes.
While some may try to discount Trump’s role in the stock market boom in this era, Seema Shah, Chief Global Strategy at Principal Asset Management, clarified that the tax cuts of Trump’s first term did fundamentally alter the growth outlook. She stated, ‘It’s fair to say he did have an impact on the equity market trajectory.’ Nonetheless, the uptick in corporate income growth was temporary, lasting just a year when profits were compared to the previous year with higher tax implications. Following this period, earnings levels remained elevated but didn’t continue to grow at the same pace.
Interestingly, predicted downturns in the stock market due to the onset of the pandemic in 2020 served to illustrate the complex ways through which policies influence markets over time. This demonstrated that the performance of the market is often more bound to expectations for growth and inflation than strictly political considerations. It’s a generally observed trend that the S&P 500 drops prior to an election and lifts after, presumably because investors frown upon uncertainty, with the market rally usually initiated once the election results are known.
Importantly, the individual in the White House has limited bearing on long-term market performance. Since Dwight D. Eisenhower’s first term in 1953, only three presidential terms resulted in negative returns for the S&P 500. Furthermore, the stock market might perform better with a divided government, offering investors a higher level of legislative predictability as laws are less likely to change in the presence of an impasse in Congress.
Though the policy is clear, it can occasionally yield unanticipated consequences. For instance, traditional energy companies fared better under Biden despite Trump’s policies being more favorable towards the fossil fuel industry. Contrarily, clean energy stocks surged during Trump’s term, a happening that left many scratching their heads given that Biden ushered in a comprehensive green energy investment package.
As the political landscape shapes up, investors are contemplating the potential implications of a ‘red wave’ where Republicans control both the White House and Congress. Critics fear inflating effects from policies like tax cuts, which, although innovative, might cause an increase in the deficit. This may inadvertently cause pressure on government borrowing costs.
The market’s direction could become less predictable as potential policy changes may coincide with a Fed interest rate cut, which would likely lower government borrowing costs. An array of policies including trade, immigration, and labor could influence the trajectory of markets and the economy. Chris Krueger, from the Washington research group at TD Cowen, contextualized this sentiment by saying how consequential these policies can be but cautioned that presidents often receive undue credit or blame based on market fluctuations.
With so many variables at play, predicting the impact of a Trump victory on the stock market if he were to run again is challenging. While it could spur a rise in rates, which traditionally hasn’t been favorable for stocks, certainty around the implications is missing. The key takeaway is that future dynamics would likely be less straightforward than in 2016.
The overall understanding is that while the presidency and policy do have some bearing on the stock market, there are various factors at play. The blend of corporate taxes, expected growth, and economic policy all combine to drive the stock market with cyclical variations in the degree of influence. Although presidents might oversimplify this relationship in their political narratives, discerning individuals appreciate the intricate workings of the market.