Democrats versus republicans: who is best for the US stock market?

nick-peters-fidelity-solutions

While current attention in the UK is firmly focused on this month's Budget and June's EU referendum, across the pond, US states will cast their votes on Tuesday (1 March) for Republican and Democrat candidates in the primary elections known as 'Super Tuesday'.

Common perception suggests that a Republican government and its pro-business policies should be positive for the US economy and ultimately stock prices.

However, research we have conducted looking at the performance of the S&P 500 suggests a different story.

Stock markets under Democrat presidents have, on average, outperformed those under Republican presidents, with average returns of 10 per cent over a Democratic president's term since 1928, against 1.8 per cent for a Republican president.

EYES ON THE FED

Out of the 22 terms of office since 1928, four terms under a Republican president ended with negative returns, which compares to just one negative return under a Democratic president, Roosevelt's second term in office.

us-stock-market-performance-under-democrat-versus-republican-presidents

While the US elections make for fascinating watching, we believe that there are bigger issues for investors to focus on.

Arguably, the next Federal Reserve meeting in March and the outlook for further rate tightening is more important for stock market returns.

Although important in the race to be a presidential candidate, 'Super Tuesday' is unlikely to have a significant impact on US stocks.

Presidential elections remain several months away, and the bigger focus will be on the Federal Reserve meeting on 16 March.

With markets having witnessed a volatile start to 2016, investors will be watching closely for the outlook over the Fed's tightening timeline.

While we think they are unlikely to hike in March, markets do seem to be underestimating the likelihood of rate rises in the US.

Growth continues to be modestly positive, and with wages accelerating and inflation likely to pick up in the coming months, we may well see further rates rises in 2016.

ECONOMIC FOCUS WILL REMAIN

The real significance of 'Super Tuesday' is that it tests candidates, with a barrage of states designed to stretch candidates and make sure that they can compete on the national stage, rather than focusing on a single state at a time.

Given this, it will provide us with a firmer idea of who the presidential candidates will be in November, and what choices the US is likely to have to make.

us-stock-market-returns-under-each-president

'Super Tuesday' is likely to garner many headlines, but irrespective of who emerges as the front-runner, or even goes on to win the US election, I do not expect to see any drastic shifts in policy. The focus will remain on the economy, where we are seeing some mixed signals.

A combination of tightening liquidity conditions and falling inflation expectations continue to restrain the Federal Reserve's ability to raise interest rates.

There are also some indications that the banking sector could see sustained regulatory pressures.

Going forward, there may be some room for fiscal policy to be used to support growth in the form of infrastructure and defence spending, which could create interesting investment opportunities.

Against this backdrop, I have been focusing on growth at a reasonable price-style defensible business models, which can deliver under most macro conditions and which are still trading at decent valuations.

While there is true value in the cyclical parts of the market, it remains important to be very selective, as there could be short-term pain for businesses impacted by low oil prices.

Aditya Khowala is portfolio manager of the Fidelity Funds American Growth fund and Nick Peters is portfolio manager at Fidelity Solutions.


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