Investors are anxious as the US elections draw near. Although politics haven’t mattered much for equity returns in the past, things could change this time because several powerful trends that developed over recent decades have set the stage for this year’s explosive political agenda.

With election day approaching, equity markets have had no shortage of political news to digest. In early October, President Trump contracted the coronavirus, raising concerns about how the final stages of the campaign will unfold. The next stimulus package is stuck in a Washington logjam. And fears have mounted that an unclear outcome in November could trigger months of uncertainty, at a time when coronavirus cases are on the rise in parts of the US and Europe, and the US economy needs decisive policy decisions to combat the recession.

Stock Returns Have Historically Been Apolitical

Political risk often makes headline news. However, over the long term, the party affiliation of the US president has had almost no impact on stock returns. In fact, over 55 years, the Dow Jones Industrial Average returned just over 9% annualized, no matter which party’s president occupied the White House (Display).

Will 2020 be different? Quite possibly, yes. That’s because the COVID-19 crisis has crystallised several long-term trends that have been developing over four decades and are making a big impact on the election agenda as well as the outlook for stocks, in our view.

2020 Election Agenda Has Been 40 Years in the Making

The campaign news cycle may refresh every 24 hours, but we trace this year’s election agenda back to around 1981. At the time, four major trends began to accelerate and create what we call the most powerful fundamental cocktail in modern financial history.

During this period, the oldest baby boomer turned 35. As baby boomers—people born after World War II—reached their peak earning years, they funnelled record amounts of income and savings into stock markets. Interest rates and inflation started falling from double-digit levels. And more industries globalized supply chains and automated production, fueling productivity gains and corporate profits.

Against this backdrop, US stocks delivered consistent gains for almost two decades. But there was a problem: while these four ingredients produced massive investment returns, they also contributed to a widening income gap in the US.