By Dan Morris, global strategist at J.P. Morgan Asset Management
"With the upcoming elections in the United States, investors may wonder what the impact on stock markets might be depending on which party comes to control the different branches of government. A look at history shows that there is a wide range of returns corresponding to the configuration: A RRD makeup (Republican president, Republicans controlling the Senate, and Democrats a majority in the House) has coincided with a gain of 5.7% in the stock market, while markets gained 17.2% when it was a DRR mix.
"Is there likely to be a change in the direction of the stock market following the election results in November, or at least better or worse returns, depending on which party wins? There are reasons to be sceptical. While it is easy to think that the president has great influence over the course of the economy (and he or she certainly receives the blame if it performs poorly), their power is quite limited. Government spending in the US makes up a smaller percentage of GDP, just 18%, than it does in other developed countries, so the direct impact on the economy of government activities is limited. And Congress makes the spending decisions.
"The bulk of government spending moreover is non-discretionary, that is, it largely occurs automatically regardless of changes to government policy. Payments on pensions, health care, etc., are going to be made irrespective of what party controls what part of the government.
"This is not to suggest that changes in government policy cannot have significant effects on particular companies or sectors. A change in a tax break or subsidy can dramatically change levels of profitability or investment levels, but this is unlikely to show up in the broader stock market's performance.
"Weightier government initiatives, such as the New Deal programme in the 1930s or the recent health care reforms, may well have more substantial consequences, but they will affect different parts of the economy in different ways and it may take years for the implications to be evident.
"Politics and elections certainly matter, but we believe investors should focus on fundamentals and the construction of a well-diversified portfolio when making their asset allocations. The appreciation of the US equity market reflects, we believe, the dynamism of the economy, and that should continue well after 2 November, regardless of who wins the day."
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