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Weekly updates in the innovation economy.

Drawing Capital Newsletter

October 30, 2020

Elections are only a few days away, and we’re wondering about what we should really focus on. How will markets react to a Biden win? What are the candidates focusing on? Does it matter who wins?

Let’s compare at a high level what former Vice President Biden and President Donald Trump are focusing on in their candidacies.

Issues Not of Concern

Although there are many topics these candidates discuss publicly, neither of them have deeply discussed issues around the following:

• Data Privacy

• Antitrust

• Diversity

• Emerging Markets

• Digitalization

• Obesity and Physical Fitness

• Mental Health

• Software and Cloud Infrastructure

• Robotics

• Medical Devices

As a result, we expect companies doing business in these areas to be largely unaffected for these specific attributes by the President. All companies should still be affected by tax and regulatory policies.

POTUS Doesn’t Change Fundamentals

Unpopular opinion - the market will continue to rise no matter who is president. Yes, it’s true that each president will focus more on different sectors, but the private sector has enough power to control growth as well. Is it likely that either candidate will suppress growth in cybersecurity or video streaming? -- We are doubtful.

Let’s look at some data.

A few caveats of the charts below:

• It includes the Great Depression (1929-1939) - so you may see negative outliers.

• Each 4 year term is looked at independently. We did not splice data by presidency, so there can be 8-year presidents depicted as 2 separate 4-year terms.

• Data for 2017-2020 is still missing 2 months as of this newsletter’s date.

This chart shows the monthly performance of each presidents’ 4-year term(s). It is evident that most of the time, the markets do go up.

This chart shows that the mean cumulative return over 4-year presidential terms is ~31% since 1929 (excluding 2017-2020). There is a clear inflection point around Month 22 which may hint that it takes ~2 years before a president’s policies begin to take effect.

If we include data from the Great Depression, there have been 5 out of 23 (24 if you include 2017-2020) terms with negative returns which occurs < 22% of the time.

Volatility

The question of volatility usually comes up during presidential elections. However it’s important to also gauge $VIX, also known as the “fear index”. Typically, $VIX increases when there is fear of markets falling.

$VIX Index over the last 4 elections (including 2017-2020)

In the chart above, President Obama’s reelection in 2012 showed little movement in $VIX, hinting that perhaps there was more economic prosperity to come.

We can see that despite Trump’s election in 2016, $VIX barely budged during the quick selloff following the Republican victory. It is possible that this was a clear signal that the markets were not afraid of Trump’s presidency; possibly even favoring it, given the campaign focus of lowering regulatory burden, lowering corporate and personal income tax rates, implementing pro-growth economic policies, and appointing a Federal Reserve Chairperson that would be accommodative to a low interest rate policy.

Compare $VIX then to now, and it almost appears that investors are increasingly fearing the combination of Biden’s election and the rise of Covid-19 cases. There is possibly a fear that, if the current predictions of Biden’s win pan out, then the rising cases will cause Biden to shut down parts of the economy, thus hurting the general economy and financial markets in the short term.

Conclusion

We believe that the US economy will continue to prosper under either candidate. We believe both candidates, as with all candidates throughout history, have their own benefits and drawbacks to the economy. However, we trust that the private sector will adapt and innovation will continue to push forward as long-term trends such as automation, digitization, and optimization should continue to improve over time.

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References:

1. "Goldman Sachs - Post Election Policies." https://www.goldmansachs.com/insights/pages/beyond-2020-post-election-policies-f/report.pdf. Accessed 28 Oct. 2020.

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