MARKET INSIGHTS
HOW LONG-TERM INVESTORS SHOULD VIEW THE 2016 ELECTION OCTOBER 2016
The 2016 election cycle has been unusual from the start. While in the weeks ahead, voters will be subject to a deluge of negativity from the candidates, we believe the
three illustrations below explain why the impact of the election on markets is likely to be far more muted than the intensity of the campaign rhetoric might suggest.
1
Checks and balances
2
Uncertainty vs. status quo
3
Fundamentals matter more than elections
Some campaign proposals may have left investors angst-ridden, but the design
of our political system ensures such proposals will face appropriate checks and
balances. In this context, Congress has often been a buffer between the president’s
campaign promises and the capital markets.
A rising (falling) stock market in the three months leading up to an election
has correctly predicted a victory for the incumbent (challenging) party 86%
of the time. These market “votes” should be seen as a referendum on uncertainty
vs. the status quo, rather than on a particular candidate.
Long-term investors should continue to capitalize on the ongoing expansion;
however it will also be important to establish a plan for the next downturn
as this business cycle matures. Regardless of the election outcome, the next
president is likely to face a recession during the next four years.
Investors may see increased volatility around election time, but should take
some comfort in knowing that the policies that get enacted will be moderate
compared to the campaign rhetoric.
In times of uncertainty, it would be prudent for investors to consider
positioning their portfolios more cautiously by reducing large risk
overweights.
High quality fixed income, a thoughtful blend of equity strategies and shifts
in overall asset allocation can all play a role in a appropriately diversified
portfolio for this stage of an economic cycle.
CONGRESSIONAL CHAMBER CONTROL
MARKETS AND ELECTION OUTCOMES FROM 1928-2016
NUMBER OF EXPANSIONS LASTING EACH NUMBER OF MONTHS
Democrats only need 4 seats to win Senate control, but 32 seats to win the House.
Meanwhile, investors should appreciate that Donald Trump and the Paul Ryan-led GOP
Congress haven’t exactly seen eye-to-eye on key policies.
Market “votes” can be seen as a referendum on uncertainty vs. status quo
12
S&P 500*
’28 ’32 ’36 ’40 ’44 ’48 ’52 ’56 ’60 ’64 ’68 ’72 ’76 ’80 ’84 ’88 ’92 ’96 ’00 ’04 ’08 ’12
Won
MATCH?
Democrat
Republican
Independent
44
54
2
HOUSE
Democrat
Republican
Vacancies
Yes
Lost
Yes
Won
Yes
Won
Yes
Won
Yes
Won
Yes
Lost
Yes
Won
No
Lost
Yes
Won
Yes
Lost
No
Won
Yes
Lost
Yes
Lost
No
Won
Yes
Won
Yes
Lost
Yes
Won
Yes
Lost
Yes
Won
Yes
Lost
Yes
Won
Yes
* (% change 3 months leading up to election)
186
246
3
Source: U.S. House of Representatives, U.S. Senate, J.P. Morgan Asset Management; data are as of September 9, 2016.
For illustrative purposes only.
10
’16
6.7
14.9 -2.6 7.9 8.6 2.3 5.4 -3.3 -2.6 -0.7 2.6 6.5 6.9 -0.1 6.7 4.8 1.9 -1.2 8.2 -3.2 2.2 -19.5 2.5 (YTD)
?
?
Number of expansions
ELECTION
YEAR
SENATE
It would be unprecedented for this expansion to last through the next president’s term
president's first
term, this
expansion would
have to last 139
months, or 53
more months.
6
4
2
0
Source: Office of the President, Standard & Poor’s, Strategas Research Partners, J.P. Morgan Asset
Management; data are as of September 9, 2016. For illustrative purposes only.
Includes current To reach the end
of the next
expansion
8
12
24
36
39
45
58
73
86
92
106
Length of expansion at peak (# of months)
Source: NBER, J.P. Morgan Asset Management; data are as of September 9, 2016.
For illustrative purposes only.
120 139
CONTACT YOUR JPMORGAN REPRESENTATIVE FOR MORE INFORMATION
READ THE FULL MARKET BULLETIN
By Andrew Goldberg, Global Market strategist and Hannah Anderson, Market Analyst
In this paper, we consider:
•H
ow we got here: Why slow growth and rising income inequality
contributed to a frustrated electorate and a divided government
MARKET INSIGHTS
An election of extremes—but a government of moderation
How long-term investors should view the 2016 election
September 9, 2016
•W
hy our base case of de facto divided government is what
ultimately matters most for markets
IN BRIEF
• We are in the midst of a very unusual U.S. election campaign. But for markets, the impact
of the election is likely to be more muted than the campaign hype might suggest.
• While imperfect, our system of divided government helps to ensure that no leader can
implement his or her policy ideas unfettered. With our base case being that of de facto
divided government, markets may well be facing a largely status quo outcome.
• Historical analysis suggests that markets tend to favor incumbent candidates in the
months leading up to presidential elections, likely because they represent less uncertainty
to investors. However, political considerations have proven to be less of a driver for
markets over longer periods.
AUTHORS
•W
hat history tells us about market behavior before, during and
after presidential elections
Andrew Goldberg
• Regardless of who wins the election, investors should expect a recession at some point
during the next four years. While long-term investors should continue to capitalize on the
ongoing expansion for now, it will also be important to establish a plan for the next
downturn as the cycle matures.
This U.S. election cycle has been unusual from the start, most notably for the unexpected rise of
non-establishment candidates Donald Trump and Senator Bernie Sanders. In the months ahead,
voters will be subjected to a deluge of negativity as the candidates largely continue to make the
case against each other, rather than for themselves. However, the impact of the election on
markets is likely to be far more muted than the intensity of campaign rhetoric might suggest.
Global Market Strategist
In this paper, we consider:
• How we got here: Why slow growth and rising income inequality contributed to a frustrated
electorate and a divided government
• Why our base case of de facto divided government is what ultimately matters most for
markets
• What history tells us about market behavior before, during and after presidential elections
•W
hy either a President Trump or Clinton will likely face a recession
in his/her first term, and how investors should think about their
portfolios given where we are in the economic cycle
Hannah Anderson
Market Analyst
• Why either a President Trump or Clinton will likely face a recession in his/her first term, and
how investors should think about their portfolios given where we are in the economic cycle
The Market Insights program provides comprehensive data and commentary on global markets without reference to products. It is designed to help investors understand the financial markets and support their investment decision making (or process). The program explores the implications of economic data and changing market conditions for the referenced period and should not be taken as advice or recommendation.
The views contained herein are not to be taken as an advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out
are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. This material does not
contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if
any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation
agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance.
J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other EU jurisdictions by
JPMorgan Asset Management (Europe) S.à r.l.; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited; in India by JPMorgan Asset Management India Private Limited; in Singapore by JPMorgan Asset Management (Singapore) Limited, or JPMorgan Asset Management Real
Assets (Singapore) Pte Ltd; in Taiwan by JPMorgan Asset Management (Taiwan) Limited; in Japan by JPMorgan Asset Management (Japan) Limited which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated
by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Korea by JPMorgan Asset Management (Korea) Company Limited; in Australia to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Cth) by JPMorgan Asset Management (Australia) Limited (ABN
55143832080) (AFSL 376919); in Brazil by Banco J.P. Morgan S.A.; in Canada for institutional clients’ use only by JPMorgan Asset Management (Canada) Inc., and in the United States by JPMorgan Distribution Services Inc. and J.P. Morgan Institutional
Investments, Inc., both members of FINRA/SIPC.; and J.P. Morgan Investment Management Inc. In APAC, distribution is for Hong Kong, Taiwan, Japan and Singapore. For all other countries in APAC, to intended recipients only.
Copyright 2016 JPMorgan Chase & Co. All rights reserved SEPTEMBER 2016