Electing the Economy

By Mark Zonca
October 2016 View more Finance

Whether you vote Republican or Democratic in next month’s presidential election, many voters are hoping the economy emerges as the true winner. According to a recent study by UBS Wealth Management, a majority of investors see a lot at stake in the upcoming election with 84 percent of investors surveyed saying the economy is the biggest issue in the election, outranking healthcare and even national security. Respondents to the survey also said a thriving economy will help put the country on stronger footing for years to come.

Whichever presidential candidate moves into the White House, their fiscal policies may have an impact on your fiscal future.

“Secretary Clinton offers an increase in taxes focused on the rich and on an infrastructure project.  This is likely to reduce the debt over the long run. The impact on employment is unknown but it’s likely to be small,” said Andre Guerra, assistant professor of Economics at College of DuPage. “Mr. Trump offers massive tax cuts and an infrastructure project that could boost the economy in the short-run, while significantly increasing the deficit and the debt over time.”

When it comes to taxes, historically speaking, Republicans favor lower taxes while Democrats support more spending on government programs.

“In theory, Republicans tend to support smaller government in the form of lower taxes and less government spending and Democrats tend to support larger government with higher taxes and more government programs and spending,” said Guerra. “In practice though, such differences are not observed and depend on each politician and on the current political environment.”

The stock market does not like uncertainty. Market watchers say the sooner the election comes to a close, the better the long-term impact will be on the markets. Historically, the stock market has performed better under Democrats than under Republicans. However, the differences vary depending on the period considered and whether it is controlled for inflation. It is also unclear whether this difference is statistically significant or not.

“The same is true about a president’s first year in office: the stock market has done better under Democratic presidents compared to Republican presidents,” said Guerra. “Generally, the stock market doesn’t do well on the first year of a president’s term. On average, the stock market does better on the last two years of a president’s term compared to the first two. Obviously, there are some exceptions, 2008 being the most notable one. Some economists theorize that this is related to fiscal policy. Politicians tend to engage in more expansive fiscal policies in year three and four of their term, so they (or their respective party) can be reelected,” said Guerra.

Whether the market will continue this pattern in the future is another story.

Some experts argue that the president actually has very little influence on the economy and instead, the Federal Reserve Chairman is the key influencer when it comes to driving monetary policy such as lending rates.

“In theory, presidents don’t have much impact on the economy. Most of the formal powers of the president are subject to congressional approval. However, the president can propose and push for legislation that can impact the economy,” said Guerra.

Outside geo-political factors are difficult to predict and even more difficult to control—such as military coups and acts of terrorism—and can also have a direct impact on the U.S. economy.

Regardless of where you sit on the political aisle, most investors surveyed by UBS, agree that their financial well being will be impacted—either positively or negatively—by the outcome of the presidential election.