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IndexIQ – February Election Update

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By Salvatore J. Bruno, Chief Investment Officer and Managing Director for IndexIQ

Primaries, caucuses, and still months to go before there’s real clarity

The stage at the Democratic presidential debates is steadily becoming less crowded, and the rate at which we see candidates start to leave the race or put their campaigns “on hold” should only increase in the coming weeks. That means this November’s election is starting to get a lot more real. Investors, who may have preferred to ignore the rhetoric from all sides to this point, are soon going to be forced to start paying attention.

It seems to us that the biggest issue isn’t who’s ahead at any point in time – it’s the uncertainty. As the race tightens, markets don’t know what or who to expect. Favorites fade. Dark horses suddenly surge ahead. A late entrant reshuffles the deck (Bloomberg, anyone?). Something completely unexpected happens, such as the Iowa app debacle (meaning we need to add technological snafus to our list of exogenous events). Even within the Democratic party there are a broad range of economic and tax policy proposals that have to be analyzed, compared, and calculated. Republicans, of course, have their own ideas.

The data, and history, suggest that the winners in presidential elections eventually track back towards the center following the primaries, though the center itself can be a shifting concept. Election years have generally been good for investors, with the S&P up an average of 9.5% since 1900 (Motley.com 12/6/19). One theory here: incumbents will do whatever they can to get reelected, or to keep their party in power. They want a strong economy and good markets, and act accordingly. The year following a presidential election has been less favorable, with the S&P 500 averaging about 3.4% (Motley.com 12/6/19). Here, presidents may be acting like a newly appointed CEO – cleaning house and taking the policy equivalent of write downs to set the stage for future growth.

How hard is it to “pick winners” when it comes to presidential elections? Well, for what it’s worth, both the Iowa Election Markets (IEM) and bookmakers in the U.K. had former Vice President Joe Biden as a slight betting favorite heading into last week’s Iowa caucuses. IEM has historically outperformed traditional polling, though as we have seen in the recent elections this is not the highest of bars, and in this case, they missed the mark as Biden came in a disappointing fourth. In 2016, U.K. bookmakers took it on the chin, giving President Trump a roughly 20% chance of winning just prior to the election. All to say, perhaps this is not the time or the topic on which to place your bets.

One thing seems likely – if the election is close, markets may see an uptick in short-term volatility (watch the VIX). That, in turn, may roil investor portfolios. Over the longer run, markets appear to be more or less apolitical, though there is some variation in the timing of returns. A 2019 Reuters story (June 26, 2019) reported that in “presidential election years, the market is up an average of 17.9% when a Republican is elected versus an average of -2.7% when a Democrat is elected.” Sounds good, but wait, Reuters further found that “in the first year of a president’s term, the market is up an average of only 2.6% when the new president is a Republican versus a whopping 22.1% when he or she is a Democrat.”

Of course, averages are just that, and we live in what sometimes seems like non-average times. But assuming that “this time is different” is nearly always a longshot bet. While the past may be an imperfect predictor of the future, it does provide some guidance. Certain patterns seem to repeat, and there is insight that can be gained from that. If you’re a political junkie, you can sit back and enjoy the give and take as the election heats up. If you’re not, you can try and tune it out. But the broader lesson from past research into the markets and presidential elections is an old one: rhetoric aside, over the longer term it’s the economy, and having the right exposures and hedges in place, that ultimately matter.

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

The Iowa Electronic Markets (IEM) are a group of real-money prediction markets/futures markets operated by the University of Iowa Tippie College of Business. Unlike normal futures markets, the IEM is not-for-profit; the markets are run for educational and research purposes.

The CBOE Volatility Index, known by its ticker symbol VIX, is a popular measure of the stock market’s expectation of volatility implied by S&P 500 index options. It is calculated and disseminated on a real-time basis by the Chicago Board Options Exchange and is commonly referred to as the fear index or the fear gauge.

“New York Life Investments” is both a service mark, and the common trade name, of the investment advisors affiliated with New York Life Insurance Company. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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