Two months to go before the US election, and wealth managers and others are starting to figure out the financial and economic implications of who ends up as president. Perhaps too little thought is given to the different outcomes of elections and other constraints.    

For investors nervously eyeing the November US presidential elections, they may be consoled to know that even if their preferred candidate does not make it to the White House, other forces can play an equally big role in shaping what happens to market returns.

In following the news cycle involving the contest pitting Vice President Kamala Harris against former President Donald Trump, it is easy to forget that there are elections for seats in the Senate and House; a large bureaucracy – aka “administrative state” – wields considerable, if controversial influence; there are business lobbies and that other constraint, the bond market.

All these thoughts were brought home a few days ago by one of those analyses that banks like to churn out. Royal Bank of Canada, in a Global Insight Special Report for August, notes that since 1953, the highest period for average returns on the S&P 500 Index of US equities was when there was a Democrat US president and Republican Congress (16.3 per cent), followed by Democrat President with a split Congress (15.7 per cent). In third place, with a Republican victory across Congress and the presidency, was 12.9 per cent. The worst result, at 4.9 per cent, involved a Republican president with a Democrat Congress.

In other words, the two best results for equity returns coincided with divided government with a Democrat in the White House, sometimes branded as “gridlock.” And that speaks, as RBC says, to how the checks and balances of the US political system are very much “features” rather than “bugs” when it comes to the impact on markets. Of course, correlation is not causation. 

That there are benefits to the American system of government and law is hardly a new observation, because the founders, particularly the likes of James Madison and Alexander Hamilton, were keen to stress these virtues from the start. What’s perhaps more striking is what RBC says about the administrative state, judiciary, and business lobbies.

“The Supreme Court’s recent decision to overrule Chevron v. Natural Resources Defense Council could constrain agencies’ power to some degree and tilts authority back to the judicial branch, specifically regarding the interpretation of ambiguous legislation. However, the impact of the landmark ruling won’t fully be determined until many diverse legal cases work their way through the courts over a number of years,” it says.

(On 28 June 2024, the US Supreme Court issued a landmark decision in Loper Bright Enterprises v. Raimondo, overturning Chevron USA v. National Resources Defense Council and the federal judiciary's 40-year-old practice of deferring to agencies' reasonable interpretations of ambiguous federal laws. In a six-to-three decision, Chief Justice Roberts wrote that the judiciary has the sole prerogative to "say what the law is." The demise of Chevron provides new avenues for regulated industries to challenge their regulators.)

RBC says that the conservative policy group Heritage Foundation was seemingly thwarted by Donald Trump in its idea for constraining federal agencies’ authority significantly as part of its controversial Project 2025 initiative. “We don’t think there are realistic prospects to achieve a comprehensive revamp of agency authority anytime soon. Efforts to do this would likely attract multiple federal lawsuits and the judicial system would have its say,” the bank says.

Business lobbies
And perhaps most striking of all, RBC argues that business interest lobby groups’ ability to constrain and shape legislation is important and often not fully appreciated. (I thought this point was surprising because complaints about business lobbies and “crony capitalism” are commonplace.)

But as RBC says: “We’ve yet to witness a single legislative cycle and presidential term when business and other interest groups didn’t achieve at least some of their lobbying objectives, often to the benefit of investors. We would not underestimate the business lobby’s significance nor creativity. They have the ears of many in Congress and key players in each presidential administration, and we think they can shape legislation and presidential directives going forward.”

And the bank concludes by noting that a president’s ability to dictate the overall performance of markets and economy is limited.

“We think the US stock market is usually less impacted by presidential achievements and missteps than investors might think, because the formal and informal checks and balances built into the government’s structure typically constrain presidents from fulfilling the full slate of policy goals, and we think this applies even more so during this period of deep polarisation within the country,” RBC says. 

“Historically, the checks and balances have often worked in the stock market’s favour. Additionally, the business cycle, the Federal Reserve’s monetary policies, and industry innovation tend to impact the stock market far more than election results. We advise investors to not allow the din of election coverage, nor the excitement or disappointment with the election outcome, to get in the way of sound portfolio management,” it adds.

Of course, none of these calming words will deter us at this news service from delving into the policy proposals of Harris and Trump, whether on capital gains tax changes, estate taxes, protectionist tariffs, price controls, and more. Where they could affect the tax and estate plans of HNW individuals, and the investment decisions they take, we will cover them. But if RBC is to be believed, the overall path of equity markets isn’t all that directly affected by which person winds up in the Oval Office, and much depends on what happens to other parts of the American legislative and administrative system. I suppose that in these fraught times, that is a comfort.