What to watch

Stocks and politics: It’s all about the economy

As Wall Street digests the first debate showdown between Hillary Clinton and Donald Trump, whether stocks zig or zag in Tuesday trading based on the debate’s outcome might be irrelevant in the long run.

Past performance shows that how stocks ultimately perform after a U.S. presidential election has more to do with how the economy is doing and less about who’s in power, John Higgins, chief markets economist at Capital Economics, noted in a report.

Economics — not politics — is the main driver of stock performance. The double-digit percentage losses for the S&P 500 stock index in the year following elections between 1968 and 1980, Higgins wrote, “can largely be attributed to the weakness of the economy during that period.” Similarly, the market’s 13% loss in 2001 was due to the “fallout from the bursting of the dot.com bubble in 2000” and mild recession that followed, not the election of Republican George W. Bush.

On the bullish side, Higgins says stock gains of more than 25% in the years following the 1984 and 1988 elections wasn’t about a big shift in the balance of power, but instead “reflected a rebound in the market’s valuation level from a depressed level, as economic fortunes improved.” The same can be said for the 23% gain in 2009 as stocks recovered from the financial crisis, he adds.

With no recession in sight, Higgins doubts the outcome of the election “will send equity prices into a tailspin, whatever the result.”