Here's an old theory: As President Donald Trump’s chances of winning the presidential election go down, so falls the stock market. Well, not so much anymore.
Let’s run through a history of why Trump drove the market, why investors wanted to see him in office in 2016, and to what degree that correlation has broken down recently.
In the beginning of his presidency, it was clear the stock market liked Trump: Between November 1, 2016 and January 1, 2017, the S&P 500 rose 4.4%.
Trump’s promise of slashing corporate taxes to 21% from 35% was fully implemented with a Congress heavily composed of Republicans. That positive for earnings was priced in immediately. The president’s threat of beginning a trade war with China caused fear, and most on Wall Street agreed the trade war would act as a drag on the market, but that lowered taxes would outweigh that. And indeed, the trade war began and trade war volatility has been a theme of Trump’s presidency. Relaxed regulations on banks helped the market too, both for the banks themselves and for the availability of credit throughout the broader economy.
And as Trump’s chances of winning the 2020 election shot up from 23% in May of 2017 to 59% on February 19, 2020, the S&P 500 gained 41%. That’s a compound annual growth rate of roughly 14%, far higher than long-term historical averages for U.S stocks of roughly 7% to 10%. Several factors allowed for that gain, such as a growing economy, falling interest rates and the continued explosive performance of big tech stocks.
But then the coronavirus pandemic hit and since February 19, the S&P 500 has failed to trade back to its all-time-high hit on that date. Since February 19, the S&P 500 fell 9% as of this production, a move that first featured a 34% drop.
Not only is the world slogging through the pandemic, hoping monetary and fiscal stimulus will be enough to quickly move employment back to pre-virus levels, but a Biden Presidency could hold stock market gains back. Biden wants to increase corporate taxes to 28%.
By late June, Trump’s chances of reelection had fallen to 36%, down from 48% March 23, according to RealClearPolitics. Since March 23, the S&P 500 had returned 38% as of late June. Stimulus, state reopenings and hopes for a vaccine are the culprits, but business-friendly policies are not exactly on the way with a Biden presidency.
On the decoupling, strategists at RBC Capital Markets pose two possibilities: investors no longer wish to see Trump remain in office or they think the pendulum will swing back in favor of Trump. Most market participants and analysts shy away from commenting.
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