Fret Not Political Winds (Or Change)…

From here to election day, there will be a lot of ink spilled and breathless chatter about politics. The airwaves will be filled with “sloganeering” and vituperative attacks on serious and non-sensical issues alike. We will probably become numb to the noise and eagerly await “the day after” the polls close. The “hot air” which will blow from campaigners’ mouths will possibly add to global warming and “make that hill a tougher climb”. But “it is what it is” as our episodic right to choose our leaders is upon us in 2020.

Away from the battle and attempting to be apolitical and analytical, why do so many investors fear a shift in political power to the Democratic Party? There is a perception that the Republican Party is the party of business and fiscal rectitude. Being such, the stock market will do better under Republican political leadership as opposed to Democratic. So what does history tell us?

Chart 1 * See Footnote

Source: Bespoke Investment Group

*-The DJIA is used because it is an older index and thus goes back further in time.
Results using the S&P500 as an index are similar.

Since 1900, under twenty different Presidents (8 Democratic and 12 Republican) the average annualized return for the Dow Jones Industrial Average has been 4.8%. With a Republican in the White House, the return has been 3.5%. With a Democratic leader, the return has been 6.7% annually. These statistics would suggest strongly that investors need not worry about the possibility of a political change in leadership. Let’s look further and consider including Congress. What has happened when a Republican President has been voted out and a “Blue Wave” has crashed into the halls of Congress?

Chart 2

Source: Bespoke Investment Group

There have been six instances previously when a Republican President lost to a Democrat. In four of those, Democrats had control of both the Senate and the House. In two, there was split control. In the session of Congress immediately before the Presidential election, the average return on the Dow was -1.58%. In the first two years of the new administration or the next Congress, the average rate of return on the Dow was 16.60%. Enough said.


Some segments of the US and world economies are doing well, while other parts are not. Housing starts and builder sentiment in America are strong and housing prices are making new all-time highs.

Chart 3

Motor gasoline supplied (a proxy for driving) has improved dramatically since its April lows. People are on the roads again.

Chart 4

Light vehicle sales for August totaled 15.19M units, demonstrating continued strength off the spring bottom.

Chart 5

The August Institute for Supply Management (ISM) manufacturing index came in at 56, beating July’s post of 54.2, and the ISM services index came in at 56.9, below July’s score of 58.1. Both measures, by registering a score over 50, signify economic growth. From these perspectives, the US is powering ahead.

Unfortunately, the same verve for road travel does not yet extend to our country’s airports. While current TSA Traveler Throughput is better than the lows of April 2020, air travel is still running about 70% below levels of 2019.

Chart 6

This sad travel situation is also reflected in the following hotel occupancy report. However, please note the dramatic increase in occupancy coming out of the spring – reflecting increased road travel. Roadside hotels/motels have rebounded more strongly than business hotels or vacation resorts, which depend more on air travel to get their guests to their destinations.

Chart 7

The same languid results have been evident in restaurants and entertainment venues throughout America and around the world. Happily, however, business has increased somewhat as occupancy restrictions in numerous locales have been relaxed. Very importantly, people have returned to work – not everyone and not everywhere, but unemployment is down to 8.4% in the U.S. from a high of 14%. Unfortunately, the continuing claims for unemployment remain at an elevated level as can be seen in the following chart.

Chart 8

In summary, economic improvement is apparent. It is not uniform. It is not “across the board”. Certainly not everyone feels good or better. Nevertheless, things are better.

Overseas, the picture is much the same – except that many foreign countries are further ahead on their economic recuperation from the “virus hit” than the U.S. With death rates far lower than in America, many other nations have their COVID -19 epidemic under seemingly better control than the U.S. Having this greater control has allowed other countries to re-open at a faster rate and to stay open. China, Taiwan, South Korea, Italy, and New Zealand are just a few to mention who have more successfully navigated the pandemic rapids than the U.S.


The summer doldrums did not appear. The “sell in May and go away” market adage was wrongfooted this time. Seeing evidence that the world was healing economically because of huge fiscal and monetary support and hearing that a vaccine was “in the wings” cheered investors to climb out of their bunkers. Company reports for the second quarter were surprisingly strong for sales, earnings and cash flow. Skilled management teams were doing their jobs and managing their enterprises through the disruption. As a result, investor spirits were lifted in New York, London, Tokyo, and Shanghai. Stock and bond prices were bid up. In fact, new highs in NASDAQ and the S&P 500 were set. The bear market of spring 2020 was history. And now what?

Two obvious topics come to mind as to what will influence U.S. markets over the next several months: the COVID-19 pandemic and politics. We believe that the world will soon have at least one vaccine, considered safe and effective, to combat COVID-19. This will no doubt hearten many. But having a vaccine does not mean the end of the pandemic and a return to normalcy of life for the world. Having a safe and effective vaccine is a necessary condition to end the pandemic – but it is not a sufficient condition. The vaccine still needs to be manufactured in great enough quantity, distributed to billions of people and enough of those people need to be vaccinated to achieve “herd immunity”. This will be a manufacturing, logistical and marketing tour de force which will extend well into 2021 and which will require central government leadership tantamount to previous preparations for a major war. A high hill to climb – but a worthy one that can be ascended. However, along the way, there will no doubt be “bumps in the road” which could upset investors. Disappointments will “pop up” and markets could sell off. We think any sell off will be a temporary condition. As to politics, we think this will be contentious and could spark market volatility. Luckily, our Founding Fathers outlined in our Constitution a mechanism for the peaceful transfer of power. Clearly defined are dates certain when one Presidential term ends and another begins – no matter if the newly elected President is the same as the incumbent or not. From early November 2020 to mid January 2021 there could be more political confusion and turmoil than usual. Nevertheless, decisions will be made and with that certainty, markets can move forward, supported by anticipated earnings increases for 2021, continued low interest rates, the very likely prospect that there will be substantial fiscal spending in 2021 to propel certain parts of the U.S. economy, and the historical knowledge that generally markets do not care who is President or which party is in power as evidenced by the first chart of this Commentary.

The pandemic is steering overseas markets, much as it controls the immediate future for American markets. In Japan, there is a new Prime Minister taking over for Shinzo Abe – but pledging to maintain Abe’s economically supportive policies. In the Eurozone, Germany’s economy is powering ahead and the rest of the continent is following its lead – albeit at a reduced rate. Chancellor Angela Merkel is on her way out and her successor is not yet apparent – but will most likely be a centrist. Importantly for the first time, the Eurozone is united in supporting the economy and will do so with a joint Euro bond offering – with Germany agreeing for the first time to allow its national balance sheet to be used as a guarantor. These infrastructure funds will promote Eurozone growth. China continues to wage a trade skirmish with the U.S., which may continue in some form, even with a change in President of the U.S. The Chinese economy has been damaged by the trade tiff, but it is still growing quite fast and faster than the American. Additionally, the Chinese stock market is one of the best performing markets in 2020, outperforming the U.S. exchanges. The Chinese are also getting much more adventuresome in the South China Sea and this could prove to be a “flash point” involving the U.S. and Taiwan. This situation should be watched. In the UK, Brexit has again pushed its way to “front of mind” for the British. Negotiating the disentanglement with the Eurozone, never thought to be easy, is becoming even more complicated. Brexit has already damaged the British economy and this latest wrestling match will only do more of the same. International stock markets are cheap vs. the U.S. and we believe that there could well be some “catch up”, sparked be a weakening dollar. Already the “greenback” has declined vs. a basket of other currencies. Higher American interest rates which previously attracted international funds have all but evaporated. Additionally, the U.S. economy is not snapping back as quickly as other countries, which have handled the pandemic in a better fashion, allowing them to reopen more quickly and to stay open longer.

So far in 2020, it has been a stock market ride not for the “faint of heart”. The shock to the world’s economic system was exogenous. The response by governments and central banks was heroic. The result has been amazing – with the shortest bear market in recorded history. There are more “bumps in the road” ahead. But we are encouraged that we are closer to the end of the COVID pandemic than the beginning and with that curtain drawn, markets will continue to advance.


  1. No recession is forecast for the U.S. Economy – No – Already has happened.
  2. Inflation in the U.S. will rise, but stay under 2% – Yes/No – There are some “embers” of inflation, but nothing significant.
  3. Interest rates will stay low – Yes – According to the Fed, interest rates will stay low through 2023.
  4. Oil prices will remain rangebound and there will be more mergers and acquisitions – No & Yes – Volatility has been a descriptor for energy prices this year. There has been a start to M&A, but there will be more.
  5. Carbon emissions will not fall – No – Reduced economic activity has reduced emissions.
  6. International equities may have a day in the sun – Yes – International securities are starting to “get a look”, Performance is better.
  7. A tale of two halves, perhaps – Yes – H2 2020 is looking better.
  8. Objects in motion tend to stay in motion – Yes – shortest “bear market” in recorded history. Stock prices have recovered to old levels.
  9. There will be no big policy changes coming out of Washington D.C. – Yes – Partisan gridlock is alive and well.
  10. Corporate America will continue to reward shareholders – Yes & No – Strong companies are continuing to reward stockholders – Weak corporations are retrenching.


The opinions expressed in this Commentary are those of Baldwin Investment Management, LLC. These views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.

The reported numbers enclosed are derived from sources believed to be reliable. However, we cannot guarantee their accuracy. Past performance does not guarantee future results.

We recommend that you compare our statement with the statement that you receive from your custodian.

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