The presidential election is a year from now. Here’s what that means for stocks

The next US presidential election is a year away. Although we don’t know which Democrat will face President Trump next year, it’s not too soon to start thinking about what the election will mean for investors.

History suggests that the market will be bumpy in the first half of 2020 but ultimately settle down once it’s clear who the Democratic nominee will be. And after the election dust settles, it probably will be back to business as usual for Wall Street.

“Election years are full of uncertainty. Investment performance could be impacted in 2020, due to this uncertainty,” said John LaForge, head of retail asset strategy for the Wells Fargo Investment Institute in a recent report. “Bonds and stocks have historically struggled in the first half of election years—then lifted later in the year as the cloud of uncertainty lifts too.”

According to his report, the Dow has had an average return of 7.6% during presidential election years since 1900, and positive returns 70% of the time during those 30 occurrences.

Although a second-half market bump during the presidential election cycle may be the norm, these are hardly normal times.

Leading Democrats have bashed US companies…

The 2020 election could pit a Democrat with anti-Big Business policies (Elizabeth Warren or Bernie Sanders) running against an incumbent who has started a trade war with China, attacks corporate America on Twitter and has threatened more regulation for Big Pharma and giant tech companies Amazon, Facebook, Google owner Alphabet and Apple.

A race between Warren and Trump could spook investors.

Warren would be bad for the markets and economy because she demonizes the wealthy, said billionaire fund manager Leon Cooperman in a recent CNBC interview. Yet he also urged the president not to run for re-election, saying Trump is focused only on his base and not the entire country.

Cooperman isn’t alone in fretting about a 2020 showdown between Trump and progressive Democrats.

“The candidates on the Democratic side have a big agenda related to broader government regulations, more intervention in how businesses go about planning and probably higher taxes,” said Christopher Smart, chief global strategist with Barings, in an interview with CNN Business.

Any move by a Democratic president to roll back Trump’s corporate tax cuts would be a problem, portfolio strategists at Goldman Sachs said in a recent report.

The Goldman analysts estimated that raising the effective tax rate from 18% to 26% would lower 2021 corporate earnings by 11% and that valuations for stocks would suffer.

…but so has President Trump

Still, Trump’s re-election may not be the most market friendly outcome, either — especially if he ramps up his protectionist trade policies and continues his attacks on health care and tech firms.

“There’s a president who has been creating a difficult business environment with global supply chain disruptions. And Trump has an agenda to bring drug prices down and get bigger tech companies to behave better,” Barings’ Smart said.

But the possibility that Trump could be removed from office via impeachment and replaced by Vice President Mike Pence — albeit remote — is also unsettling.

Impeachment proceedings and a change in Washington in general “cannot be dismissed as political theater with no important implications for markets,” Putnam’s fixed income research team said in a recent report.

“At some point, asset markets — both equity and fixed-income — may have to price in political uncertainty and changes in the policy agenda,” the Putnam analysts said.

Still, most analysts and strategists think chances are slim that Democrats will win control of the Senate in 2020, even if they retain a majority in the House and wind up winning the Oval Office. The likelihood of significant policy changes in Washington would then remain somewhat remote.

Biden best for market?

So is there any outcome that the market favors? Joe Biden appears to be Wall Street’s top choice among the current Democratic contenders.

Alicia Levine, chief strategist at BNY Mellon Investment Management, told CNN Business she thinks the market still sees Biden as the likely Democratic nominee and that investors aren’t too worried about the chances of Warren or Sanders.

Otherwise, Levine said, stocks probably wouldn’t be at all-time highs.

“Investors right now are pricing in a market-friendly outcome to the election — either a Trump victory or a centrist like Biden winning. The market thinks that Elizabeth Warren or Bernie Sanders may not be as successful in the swing states,” she said.

Smart also noted that investors are looking at a lot more than just US presidential politics. Many other factors could keep the current rally going — even if Trump and his eventual opponent rattle investors.

“A combination of lower interest rates, Chinese recovery and resilient US consumer demand could yet drive stocks to new highs over the next 12 months,” Smart said in a report. “But it won’t get any help from the Democratic presidential candidates or the incumbent Republican.”