Election day is approaching, and investors are not only wondering what is next for the country, but also what is next for the markets. How do political policies such as taxes and social programs affect the stock market? In this blog post, we will discuss what history can tell us about the interaction between political policies and stock market returns.
What can history tell us about tax policies and social programs and their effect on the stock market? The answer is very interesting and probably not what you would expect (depending on your political views). In our recent past, two of the more notorious presidents for tax cuts have been President Reagan and President George W. Bush. During Reagan’s time in the white house, congress cut the highest marginal tax rates from 70% down to 28% by the end of his second term. Congress also enacted tax cuts that decreased the lowest income tax bracket from 14% to 11%. His administration also cut capital gains tax rates from 28% to 20%. How did the stock market do during his tenure? The S&P 500 faired well and was up, on average, 15.8% annually during his presidency.
Before you start thinking that tax cuts are the end all be all for the market, let’s look at George W. Bush’s presidency. In 2001 and in 2003 congress passed tax cuts which reduced the income, capital gains, and dividend tax rates. The market must have gone up during his presidency, right? Not quite. During Bush’s two-term presidency, the S&P 500 was down, on average, 4.4% per year.
Let’s dig a little deeper into what happened during the Bush presidency. Upon stepping foot in the oval office, the market was in the middle of one of the worst crashes in recent history. The tech bubble had just burst, and many “dot-com” companies went belly up overnight. Several months later, we had the 9/11 terrorist attacks which lead to more market volatility as our nation dealt with uncertainty. Toward the end of the Bush presidency, the 2008 financial crisis began, and the S&P 500 was down nearly 17% in October 2008 alone (right before the election). All these items were HUGE market events that had little to do with who was sitting in the oval office at the time.
Many argue that higher taxes and social welfare programs are bad for the stock market. One of our most recent presidents that was known for both was President Obama. During his tenure, Congress passed the Affordable Care Act as well as raised the top marginal tax rate to 39.6%. While Obama was in office, Congress also created a “surtax” on investment income. Certainly, this would crash the stock market, right? During the Obama years, the stock market was up 16% on an annual basis.
While Presidents like to take credit for good market runs and lay blame for bad ones, history tells us that the person and political party in the White House is just a small variable relating to the success of the markets and economy. Other more prominent factors such as consumer spending and behavior, inflation, GDP growth and commodity prices that are all baked into stock prices. As history shows us, it is not clear cut that these policies have a direct impact on financial markets.
We cannot stress enough the importance of having the proper investment strategy, no matter who controls the White House or Congress. This election season be sure to vote with your ballot and not your bank account. You should also remember that you are investing in companies and not political parties or their policies. If you need help devising an investment strategy to meet your needs, please contact us today.