For investors, knowing some history about how elections have affected markets in the past may make them more able to stay the course with their personal strategies as this election approaches. Yes, the market may fall 5% right after the election, particularly if the result is contested. Or go up 5%. Joe Biden may do even better than polls are predicting. . . or Donald Trump could pull off another upset. In fact, even if we knew the result of the election ahead of time, it would still not be possible to know with any significant measure of assurance what the market reaction would be.
When Trump won in 2016, the conventional wisdom was that technology stocks would suffer under his administration while financials and energy would benefit greatly from reduced regulation. In fact, in the last four years, the exact opposite has happened. Our view is that an investor’s specific financial goals should dictate portfolio strategy, not singular events which come and go.
Politics and Returns
History shows that stocks tend to appreciate no matter which political party is in power. Nor has it mattered for markets if one party controlled both chambers of Congress along with the White House or if power was shared. According to the Wall Street Journal, in the 45 years during 1929-2019 in which one party controlled Washington, the S&P 500 Index rose, on average, 7.45% annually. In the other 46 years of divided government, the S&P 500 Index went up, on average, 7.26% annually.
The Major Election Risk
Elections do present a key risk to investors, however. As Election Day approaches, an investor may be more likely to make an abrupt change to his or her long-term investment strategy. Making a significant shift in strategy can take the form of going “all-in” to increase risk (and potential return) if an investor is highly confident of a certain result. Usually, however, a strategy shift involves an investor raising a large amount of cash in the face of increasing market volatility and uncertainty.
When investors stay invested during the inevitable periodic downturns, they have, historically, recouped their losses by just remaining invested. However, it is much more difficult to catch up with a market that has already moved higher if an investor has retreated to a very conservative position and has to play catch-up. Because it is impossible to predict the impact of elections (and all other events) on the markets, we believe the best course of action is to maintain the strategy that is right for your particular goals. Many investors have multi-decade investing horizons, and this election is just one of many, many uncertain events that will come along.
Getting Ahead of COVID
While this election is certainly among the most contentious and polarizing in recent history, we believe that by far the single largest factor for global markets today—and for the coming year—is not who occupies the White House or controls Congress, but rather our collective progress in combatting Covid. With new cases and hospitalizations spiking in Europe and the U.S., further lockdowns are likely on the way. Business and travel are simply unlikely to spring back without a solution for Covid, and the longer we go without one the longer it will take for us to work our way back to full employment and a healthy economy.
For now, markets are volatile and the near-term political and economic outlook is highly uncertain.
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I hope everyone is staying safe. As always, I welcome your comments and feedback.