Bernstein: Stay Away from the Noise, the Election Isn't That Important for the Stock Market

The U.S. election is in full swing, with the market filled with various political opinions and predictions.

However, amidst the noise, it is difficult to discern truth from falsehood. How can investors gain insights into investment opportunities from the political "noise"? Institutional investor and Hall of Fame member Richard Bernstein believes that the impact of the presidential election on the market is not as significant as commonly thought, and industry returns can sometimes be completely contrary to pre-election expectations.

On the 4th, he pointed out in an article for the Financial Times that fundamental factors such as earnings and valuations are more important than political slogans. The political fears surrounding budget deficits and debt levels during the election are often just election noise that obscures real investment insights.

Bernstein is the former Chief Quantitative Strategist at Merrill Lynch and the founder and CEO of Richard Bernstein Advisors.

Regardless of who occupies the White House, the U.S. stock market generally performs well

Bernstein believes that the ability to interpret real investment information from the noise has always been key to investment success. However, the highly polarized U.S. presidential election today poses challenges for investors, making it seem more difficult than ever to filter out important information from the exaggerated chorus.

He stated that historically, the president's impact on financial market returns has been relatively small. But due to the excessive market attention on the current campaign, today's investors need to remain particularly calm:

“The market's short-term reaction to the election may vary, but in the long run, the returns of stocks, asset classes, and industries are not influenced by the presidential term.”

Bernstein pointed out that regardless of who occupies the White House, the U.S. stock market generally performs well. For example, since Jimmy Carter's presidency, the S&P 500 index has achieved double-digit annualized total returns during each presidential term, except for the negative annualized returns during George W. Bush's term.

During the presidencies of Obama and Trump, the S&P 500 index also achieved an annualized return of 16.3%, despite their vastly different policies.

Bernstein also believes that the president's impact on industries is not as significant as commonly thought, and industry returns can sometimes be completely contrary to pre-election expectations. There is almost no correlation between election slogans and subsequent asset class returns.

For instance, Trump disparaged the tech industry during his 2016 campaign and pushed for expanded U.S. energy production. However, it turned out that during his presidency, technology was the best-performing industry, while energy was the worst-performing industry.

After Biden took office, he emphasized clean energy and other environmental, social, and governance priorities. However, the energy sector, dominated by traditional producers, has so far been the best-performing industry during his term.

Asset returns are unrelated to election slogans

Bernstein pointed out that fundamental factors such as earnings and valuations are more important than policies. For example, during Clinton's presidency, U.S. small-cap stocks outperformed emerging markets, despite his globalist policies; during Trump's presidency, U.S. multinationals and emerging markets outperformed U.S. small-cap stocks, even as he emphasized protectionism

"It has been proven that fundamentals such as earnings and valuations are more important than NAFTA or MAGA."

In addition, Bernstein believes that the political fear of budget deficits and debt levels during elections is often election noise that obscures real investment insights.

Although both the Democratic and Republican parties have been criticized for not demonstrating a history of fiscal conservatism, Bernstein argues that the burden of paying interest on debt in the U.S. has been heavy over the past few decades:

"The proportion of interest payments to GDP is rising, but it has been high during the 17 years of the Reagan, Bush, and Clinton administrations."

There are also concerns that the U.S. may eliminate debt by triggering inflation. However, Bernstein points out that this prediction overlooks the fact that the U.S. has actually reduced the real burden of debt through inflation during the administrations of Lyndon Johnson, Richard Nixon, and Jimmy Carter.

Bernstein believes that de-globalization and the re-industrialization of the U.S. economy may be an investment theme that transcends politics, as both parties recognize that America's dependence on the production of most goods from other parts of the world has become a national security risk.

"Regardless of who wins the election, domestic small and medium-sized industrial stocks seem very attractive."

Finally, he notes that investors should make investment decisions based on time-tested fundamentals, remaining calm and focused. The political noise during the election may produce little significant market information