White House Transitions and Financial Market Volatility
November 13, 2020
This update examines how financial markets performed between America’s Election Day in early November and the ensuing presidential inauguration on the following January 20th. It considers only those times when the party affiliation of the president changed, which happened five times between 1980 and 2016. More times than not, these periods experienced market volatility of one sort or another, which isn’t that surprising. Presidential occupancy is likely to change when the U.S. economy is in some sort of economic imbalance, and new presidents from the party previously out of power are apt to stress economic policy change over continuity.
The presidential election of 1980 when Reagan beat Carter occurred roughly midway within the one-year interval that separated two U.S. recession. The Federal Reserve had re-framed monetary policy in October 1979 around money growth containment rather than a desired interest rate level but did not put that new plan into serious action until Reagan was elected. The Fed conducted an operation of matched sales on the very next day. The dollar rose 4.3% against the Deutsche mark between election day and Reagan’s inauguration, at which time U.S. consumer price inflation was running at 11.8%. The combination of a quantitative monetary tightness that drove U.S. interest rates sharply higher in 1981 and the Kemp-Roth tax cut legislation lifted the dollar by an additional 28% during the first 6-1/2 months of the Reagan presidency. Republican occupied the White House until January 1993, by which time CPI inflation had fallen to 2.9%.
The dollar appreciated 2.3% against the German mark and 1.0% versus the Japanese yen between Election Day in 1992 and when Bill Clinton took office the following January 20th. The uncomfortable policy imbalance then was not excessive inflation nor deficient economic growth but rather a sizable trade deficit especially with Japan. Clinton’s first Treasury Secretary Lloyd Bentsen pursued a weak dollar/yen policy, which promoted a 15.4% slide of the U.S. currency against the yen by June 14th even as the dollar rose by a further 1% in that span against the mark.
The most intriguing presidential change prior to this year was the one in 2000 because then, like now, the outcome was not quickly known. Only a couple hundred votes separated Bush from Gore in Florida’s count, and the overall electoral college vote was close to a dead heat, with Florida going to decide the overall outcome. Not until a 5-4 partisan split decision in the Supreme Court in mid-December and Gore’s acceptance of that tainted verdict did the winner emerge. During the period between Election Day and Bush’s inaugural on January 20, 2001, the dollar fell 7.5% against the euro and by 2.9% on a trade-weighted basis, while appreciating 8.6% relative to the yen. Also during those 10-1/2 weeks, the ten-year Treasury yield advanced by 68 basis points to 5.18%, and the DOW declined by 3.3%.
The election campaign of 2008 was waged in the midst of the Great Recession. U.S. real GDP plunged 8.2% in the fourth quarter, and after voters chose a president of the opposite party, Barack Obama inherited zero percent CPI inflation and an economy teetering on the brink of depression. The DOW by Obama’s inaugural on January 20 had dropped 17.4% since Election Day and would go on to record a 32% plunge from Election Day to its trough on March 9, 2009. The ten-year Treasury yield following the 2008 election fell 136 basis points by the time Obama was sworn in. A combination of fiscal and monetary support, much of which was experimental in nature, ended the recession by mid-2009. Positive GDP growth occurred before the labor market turned, but the U.S. economy managed to sustain its upswing through the final 7-1/2 years of the Obama presidency and the first three years of Trump’s stewardship.
Markets greeted Donald Trump’s victory in 2016 in a hopeful mood. The economy was chugging along in the sweet spot of 2.5% growth and 2.5% inflation. Between Trump’s election and his inaugural, the dollar rose 9.0% against the yen and 3.2% versus the euro and on a trade-weighted basis. The DOW climbed 8.2% to 18,832, and the ten-year Treasury yield went up 60 basis points to 2.46%.
The once-in-80-years economic downswing known as the Great Recession was followed less than a decade later by an even greater economic threat when the Covid-19 pandemic struck. Mishandling of that disease in which America has accounted for 19% of worldwide deaths with just 4% of its population was the main issue in this year’s presidential election. Biden’s margin of victory was quite a bit larger than Bush’s in 2000 and Trump’s in 2016, but President Trump refuses to concede or speak publicly. Uncertainty is running unimaginably high, fanning voter polarization andputting national security at risk. The period ahead could see heightened volatility spill over into financial markets.
Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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