Will Liz Warren kill the stock market?

Via FTAlphaville:

Hedge funds are worried about Elizabeth Warren.

On Monday, famed investor Paul Tudor Jones warned a crowd at the Robin Hood Conference that if Warren wins the 2020 election the S&P 500 index will drop 25 per cent.

Yikes.

Jones’ warning follows similar sentiments from Leon Cooperman, the billionaire founder of Omega Advisors, who told Politico:

What is wrong with billionaires? You can become a billionaire by developing products and services that people will pay for. I believe in a progressive income tax and the rich paying more. But this is the fucking American dream she is shitting on.

He also predicted a 25 per cent drop in the stock market. Rob Citrone, of Discovery Capital Management, and Jeff Vinik, who once ran Fidelity Magellan Fund, have also expressed fears over what Warren’s policy proposals might do to markets, reported Bloomberg.

However, if market history is anything to go by, then we’re not sure these masters of the universe have got this one right.

The reason is simple. Democrat presidents have far superior market returns to Republic presidents. How superior? A recent working paper by Lubos Pastor and Pietro Veronesi of Chicago’s Booth School of Business lays out the numbers in detail:

Stock market returns in the United States exhibit a striking pattern: they are much higher under Democratic presidents than under Republican ones. From 1927 to 2015, the average excess market return under Democratic presidents is 10.7% per year, whereas under Republican presidents, it is only −0.2% per year. The difference, almost 11% per year, is highly significant both economically and statistically

And here’s a neat chart our graphics team put together showing the S&P 500’s performance under various presidents, going all the way back to 1970:

Figuring out why Dems garner the best returns has largely escaped academia, leading to economists dubbing the issue the “presidential puzzle”. (There is also a significant gap in GDP growth — 3.2 per cent, in case you were wondering.)

Pastor and Veronesi reckon it’s all about timing. Republican presidents often get elected when expected returns are low and vice versa. This is because Democrat presidents tend to take office when the economy is weak, and therefore risk aversion is high. As the economy recovers, consumers and businesses begin to regain confidence, and take on more risk — whether in the form of spending, or investment.

A great example would be Obama’s presidency. He inherited a distressed economy and stock market off Dubya which, arguably, would always recover. Still, a return of 182 per cent in the S&P 500 is nothing to be sniffed at. (We also note that many predicted a further stock market crash under Obama in 2008, but there we go.)

It seems to Alphaville that this latest bout of predictions from the market wizards aren’t so much about predicting the market, but from the fear a portion of their own wealth may be taxed at the usurious rate of <checks notes> 2 per cent. This is wealth, we should note, that was built on several structural tailwinds — falling interest rates, pro-supply side policies, financialisation, globalisation and the IT revolution — which made it the greatest era to own equities in recent history.

Alphaville has little doubt that Warren’s proposals — such as the fracking ban or Medicare for all — would cause problems for some sectors of the market, but if history tells us anything it’s that when the Dems are in office it’s a good time to go all in on stocks.

But, just to cover our backs, don’t take that as investment advice.

Probably right. The fracking ban is minor given it only applies to federal land, medicare is just as likely to boost consumption as hurt pharma.

For me the big two questions for earnings during a Warren presidency is how she handles China and the role of MMT.