I would rather be positioned as a petrified bull rather than a penniless bear.– John L. Person (professional trader, author and speaker, personsplanet.com)
Elections often seem momentous, and the presidential election of 2020 is certainly no exception. While it could be viewed by some as merely a referendum on President Trump’s general personality, to many voters this election is about much more than Trump vs Biden. For many Americans, it is about free market economics vs socialism, constitutionalism vs judicial activism, personal responsibility vs government expansion. In short, it is about what virtually every U.S. presidential election is about! In no way are we downplaying the importance of the election; rather, we are seeking to highlight that virtually every election in U.S. history has had some element which makes it feel momentous. From the first presidential election in 1789 to the current election of 2020, significant issues have been debated. From the acrimonious elections of the early 1800s to the hanging chads of the Bush/Gore contest of 2000, our elections have often been quite dramatic. What is an investor to do? How have elections actually affected investment markets? How do we prepare our portfolios for November 3?
Markets hate uncertainty, and, by definition, elections are uncertain! Consequently, it is easy to see why investors always get a little nervous heading into any major election. However, despite the hype, perhaps the most important fact to remember is that U.S. equity markets go up 70% of the time! That is a significant statistic and may be the most important element for investors to consider on the eve of an election. Elections are no easier to “time” than other major events, and building your portfolio to take advantage of the longer-term trends in the market is, in our view, a better alternative than reacting to current events that are relatively short-term in nature.
It is also encouraging to note that on average presidential election years—while not the best year of a presidential cycle (that honor goes to the pre-election year)—are positive. Since the election of 1832, the Dow Jones Industrial Average has posted an average annual return of 6% during election years. Further, since the election of 1952, the last seven months of an election year have only been negative twice, once in 2000 and again in 2008, so the odds favor a positive year-end return regardless of the outcome of the election.
Both Republicans and Democrats have presided over bull and bear markets, and despite concerns about perceived “unfriendliness” of the Democratic platform toward big business, Democratic regimes have edged out their Republican counterparts in terms of market performance. While we are considering election year statistics, we should also note that often sitting presidents do everything in their power to boost market and economic performance late in the latter half of their presidential term. Trump has certainly focused on the stock market, and despite the recent recession brought about by government-induced viral containment measures, the market has rebounded much more quickly than expected. Historically, when the market rallies between July 31 and October 31, the incumbent wins the election. Currently, that indicator would seem to give an edge to President Trump. Nevertheless, the stock market is bit like baseball in this respect: there is a statistic for every eventuality.
As we have noted, a longer-term view and a well-designed diversified portfolio provide substantial protection in the face of election year uncertainty, but that is not to imply that there is no impact of the election on investment markets and economy. Indeed, the impact is significant both in the short term and the long term. In the short term the uncertainty surrounding the election often results in heightened volatility, and until the outcome is finalized, we expect this to be the case in 2020. Further, the platform supported by each candidate does have real implications for the future direction of the U.S. economy, and those implications must be considered when evaluating one’s portfolio. However, a short-term, knee-jerk, response should be avoided.
As we consider the coming election, a few key insights come to mind that we believe are particularly relevant to investors:
- Initially the market viewed the prospect of a Biden presidency as a threat and the reelection of the incumbent as a pro-business alternative;
- Over the last few weeks, the market’s prevailing wisdom has shifted, and the market appears to have become more comfortable with either candidate being elected;
- While a Biden presidency will almost certainly result in higher tax rates, the market seems to believe that a larger stimulus package with a significant focus on infrastructure will help offset any proposed increase in taxes and will result in a significant short-term boost to the U.S. economy;
- The government’s Covid Response Initiative remains an election wild card and while it seems likely to us that a Biden victory may result in a less business-friendly response, the market seems unconcerned about a change in tactics;
- A Trump win in November is likely to result in continued deregulation and business-friendly policies.
Taken together, these insights should provide investors with hope that the fourth quarter of 2020 may result in a continuation of the current market rally. However, the divergence between the two parties and the vitriolic nature of the last few days of the campaign along with an uncertain result make additional volatility likely. We suggest investors continue to follow their long-term investment plan, increase liquidity, and avoid aggressive short-term moves as we approach November 3.