Juergen Buettner

The U.S. presidential election not only produces controversial headlines in the media, but also raises concerns for many investors.

The question of who will be the next U.S. president and what the election result could mean for the financial markets brings the kind of uncertainty that often rattles investors.

There is a saying that “political stock markets have short legs.” But it seems many investors doubt whether this applies to the November election. The uncertainty has to do with two things: First, the U.S. is in difficult times economically, and despite a low unemployment rate, its society seems to be increasingly more divided. Second, the presidential candidates are not very popular with the electorate, to say the least. The Pew Research Center found in a survey conducted in August that only 31 percent expected Hillary Clinton to be a “great” or “good” president, while 45 percent expected her to be “poor” or “terrible.” As for Trump, only 27 percent of respondents said he would be “great” or “good,” while 55 percent expected him to be a “poor” or “terrible” president.

Heidi Richardson, head of investment strategy for U.S. iShares, noted: “Judging by the frequency of questions we are asked these days about the implications of the upcoming U.S. election, it has become top of mind for many – if not most – investors.”

What bothers investors are the personal profiles of the candidates, as well as their campaign platforms. Johnny Bo Jakobsen, U.S. chief analyst at Nordic financial services group Nordea, considers the contest between “Dangerous Donald” and “Crooked Hillary” as a race between perhaps the two most unpopular candidates and polarizing figures in modern U.S. history.

Looking at the candidates’ campaign promises, there is a risk that after the elections more populism and protectionism will emanate from the White House. While both candidates favor more spending on infrastructure projects, there are significant differences in other areas. With regard to environmental policy, for example, the proposals of Clinton and Trump are polar opposites, says Hendrik König.

“While Clinton wants to transform the U.S. into a clean energy superpower, Trump prefers to focus on conventional energy sources,” explains the strategist at the German private bank B. Metzler seel. Sohn & Co.

A lot is pure speculation

Against this background, it is not surprising that investors are thinking hard about the impact of the election outcome on individual industries. Among the big questions they ask themselves is whether a President Trump or Clinton would be better for the stock market. If history is any guide, based on data since 1928, S&P 500 returns have been stronger under Democratic presidents than under Republicans (see graph). After a more detailed analysis, Merrill Lynch quantitative strategist Savita Subramanian concludes that historically, returns have been strongest in election years with a leadership change but not a political party change. A Clinton win would represent such a leadership change with no party change. If Trump were elected, the combination of both a leadership change and a party change, historically, has resulted in the lowest returns, Subramanian writes in a study.

With regard to a potentially more populist government in the future, James Butterfill, head of research and investment strategy at ETF Securities, says that would likely mean trade policy changes, rising government deficits, increased inflation and market volatility. In that environment, he prefers defensive equities, inflation-linked bonds, precious metals and infrastructure. As far as sectors are concerned, Christoph Riniker ranks infrastructure as the winner, regardless of whether Clinton or Trump wins. According to the analyst at the Swiss bank Julius Baer, this also applies to the aerospace and defense sectors. The impact on the pharmaceutical industry, however, could be mixed, depending on the industry segment.

For financials, he believes both Clinton and Trump could have a positive effect. A Clinton presidency should turn out positive for immigration, he says, but negative under Trump’s leadership.

Recession risks and regulatory trends matter

All of this is highly speculative and most of all, it should not be forgotten that U.S. policy largely depends on which party controls the House of Representatives and the Senate.

“The U.S. presidency may still be the most powerful job in the world. Except for foreign policy, however, there is little a president can do without congressional support. When it comes to the things investors care about most, notably fiscal policy, Congress is key,” says Stefan Kreuzkamp, CIO at Deutsche Asset Management.

The fact that the stock market has performed better under Democratic presidents than under Republicans should not be overestimated, if only for statistical reasons. Ed Clissold, chief U.S. strategist at Ned Davis Research, points to the fact that this is only the 30th presidential election since 1900. When one divides the elections into categories such as political party or incumbent winning or losing, there are even fewer cases for study.

In addition, stock prices are ultimately more influenced by the development of the economy and most of all by the health of corporate earnings. The first question investors should ask themselves is: In what direction is the economy heading?

To find reliable answers, market participants should follow the ISM Purchasing Managers’ Index. If that indicator of the economic health of the manufacturing sector falls below 45, it coincides with an official U.S. recession in 11 out of 13 times since World War II. That, in turn, according to Bank of America Merrill Lynch, was historically associated with a minimum drop in profits of 5 percent to 10 percent.

Since stocks usually suffer under overregulation, the future direction of the markets also depends to a high degree on what will happen in terms of regulation. Developments since the year 2000 have led to significantly greater regulation, and small and medium-sized U.S. companies currently consider overregulation and taxes their main problems.

Long-term investors stick to their strategy

Based on these findings, it is important to closely monitor the recession risks and the regulatory trends. As long as the lights on the stock market are not flashing red, it is also advisable to continue to bet on those winning stocks that move within existing long-term upward trends. These marathon runners, whose prices rose ideally over decades have proved that they can deliver price increases regardless of which party and which president is in office.

This approach is backed by findings of Capital Group analysts, who point out that in 17 out of 18 presidential election years, a hypothetical $10,000 investment in the index made at the beginning of each election year would have grown larger 10 years down the road. Given that past results are no guarantee of future results, the following advice of the Capital Group rings true: “Presidential campaigns draw the public’s attention to bad news, which can be a serious distraction for investors. But those who tune out the noise, focus on long-term goals and avoid trying to time the market have tended to reap the rewards in the long run. That’s true during presidential elections – and any time of the year.”