September 2020 was a particularly dismal
month for investors, all three major
U.S. indexes posted their first monthly
loss since the beginning of the
pandemic in March.
And the CBO volatility index, often
used to gauge the market's fear, spiked
above 30 for the first time since
mid-July. I think this near-term period
where we have not only covid winter,
but significant policy uncertainty
about the United States, when you can't
be certain who will be the president of
the United States, what party will be
in control. Then you're going to have
some elevated volatility. the market,
typically slows a little leading up to
an election and reacts more positively
in the short term when a Republican
president is elected.
The stock market and the political
environment clearly are closely
interrelated, and the stock market
reacts generally to political news.
And the stock market watches the
outcome of the election and the
presidential election in particular,
very closely. Trump tax reform, tax
code changes.
I mean, I criticize aspects of it on
fairness grounds, but the stock market
looks at earnings and that tax plan was
a huge gift to corporate earnings.
Remember, though, only 52 percent of
American families are invested in the
market. Long term policy has a bigger
impact on the economy than market
performance. The economy has
historically performed better under a
Democratic president.
The GDP grew one point six times faster
on average, and private sector job
growth was nearly 2.5 times faster on
average under the Democrats.
But the election can be an important
element for those looking to earn big
in the market. So how does the U.S.
election impact the stock market and
how can investors prepare?
Historically, the stock market slows
down and shows a weaker performance in
the period leading up to the election.
On average, the equity market showed
less than a six percent gain during the
election years, compared to an eight
point five percent gain in any other
given year. The stock market hates
uncertainty and of course, election is
the ultimate uncertainty.
I think particularly after 2016, when
people expected one result, we've got a
different result. Or after 2000, when
you had an extraordinarily tight race
and you saw the market go down after
that. These are reminders that this is
a piece of uncertainty which you really
can't minimize.
And that uncertainty and the fear of
what is to come will generally depress
the valuations, which would translate
into potentially lower returns than the
year before an election is to take
place. However, despite a more modest
return, stock performances during an
election year have done well across the
last seven presidential election
cycles. Average gains for major indexes
like the S&P 500 and Dow Jones showed
positive returns in the six months
before Election Day.
The only exception being the 2008
financial crisis that rocked the stock
market right ahead of November.
Despite the concerns over market
volatility following the market
performance in September, experts
reassured that volatility is just
something to be expected at this time
of year. Typically, market volatility
or at least volatility implied by the
buy the options market will be elevated
ahead of an election and generally
resolved following an election.
If an election result is going to be
conclusive and current situation, we
might worry that a resolution of
ultimate uncertainty is going to take
some time if the election is close or
contested. The bright side is that for
investors is that most of that
volatility can usually set off some
pretty good buying opportunities
because what will happen, the markets
will adapt. The market will just get
used to whatever the new circumstances
are and it will continue to go higher.
Barack Obama, a great example for that
and certainly not the kind of person
you would perceive as being a friend to
Wall Street. But the markets did great
during Obama's two terms in office.
So it's just a matter of adapting,
adjusting, getting past that initial
bout of volatility and figuring out
what you're dealing with. Certain firms
like LPL Financial have also tried
using past market data and performance
to predict who would win an election.
When you get within three months of the
election, which is about next week or
so, how stocks do has a really good
track record for who might win.
Now, here's what I mean by that.
If the S&P 500 is higher, the incumbent
party tends to win.
And if the S&P 500 is lower, the
incumbent party tends to lose.
Think of it like this. Stocks have been
right every single year since nineteen
eighty four. And they've been right 20
out of twenty three times, all the way
back to the late nineteen twenties.
That comes out to an eighty seven
percent winning percentage.
If the stocks are right again this year,
The winner would be the incumbent
president, Donald Trump, after a slow
market recovery since the beginning of
August. However, some market experts
remain skeptical of drawing foregone
conclusion based solely on market data.
Every election is different.
Every election is different because the
candidates are different. Every
election is different because the
environment is different.
So I think you have to really just
think about where we are, what the
policy differences would be, what the
personality differences would be, what
the configuration of Washington overall
would be after the election.
You've got to factor all that in making
investment decisions, but you shouldn't
just resort to sort of a back of the
envelope. This is what happens with
elections, because I just think that
that kind of calculation is pretty
crude and not not very useful.
So what happens once the vote has been
cast and tallied, according to a study
from the U.S. bank, stock market
returns tend to be slightly lower after
the year following the election.
JPMorgan also discovered that in the
short term, markets tend to react more
positively right after the election of
a Republican president, possibly due to
the preconception that Republican
policies are more market friendly,
especially when the election was close.
A surprise or near a surprise outcome
where a Republican president is elected
corresponded to a positive market
reaction and a surprise or close
election result in favor of a
Democratic candidate produced a
negative market reaction.
However, in the long term, it's a
different story. If we look at the
entire presidencies, the stock market
performs on average much better during
Democratic presidencies than the
Republican one. So the bulk of returns,
positive returns in the market actually
are earned during Democratic
presidency. This could be a bit of an
artifact of that of the timing, and
this could be an artifact of the
timing, because if we look at the past
presidential elections, Democrats are
more often the winners in a recession,
whereas Republicans are more often to
gain power during an expansion or go up
close to the peak of an expansion.
Changing the resident in the White House
also impacts the market.
Analysts found that stock market gains
averaged at around five percent when a
new party came into power, compared to
six point five percent when the
incumbent president is reelected for a
second term. during the first term of a
new president, there is still some
uncertainty about what the president's
policy is going to be, and so the
market valuations might reflect that
uncertainty. Whereas a second term of
any president is typically going to
continue the policies of the previous
presidency, of the first term of that
same president. And therefore there is
less uncertainty for the markets to
process and therefore that might
contribute to a higher, higher
valuations during that second term.
In case of general elections,
congressional results could impact
market performance similar to
presidential elections.
Which party controls Congress is not a
factor to equity performance.
However, history has shown that the
market performs better under a divided
Congress as there is less chance of
drastic policy changes.
So the market will do well with a
Democratic president and a Republican
Congress or a Republican president and
a Democratic Congress.
A great example of that was during Bill
Clinton's time in office.
Most of the time that he was there, he
was dealing with a Republican Congress.
The same thing for Barack Obama had to
deal with a Republican Congress for a
good portion of the time that he was in
office in the market tends to like that
gridlock atmosphere because they
figure, you know, we don't really trust
you guys anyway. And by having a split
party thing with it kind of helps to
make sure you guys don't break anything
while you're there, Whatever the result
might be, a majority of investors do
agree that the presidential election
will have an impact on the equity
market. According to a recent survey
from Hartford Funds, 84 percent of
investors said the 2020 election
results will impact their investing
habits. I only see more uncertainty
ahead because the election is probably
going to be close and the result is not
going to be settled for quite some
time. And so I would say the risks are
definitely on the horizon for
investors. However, almost every expert
unanimously agrees that placing stock
bets based on politics isn't a great
idea. First of all, people are biased.
People always think that their favorite
candidate is going to be best for the
stock market. Second of all, people
think that they're able to predict how
the election's going to turn out.
And as we've learned to in many
elections, we really don't know.
And finally, people think they know how
the market's going to react when you
get that election result.
I know a lot of Republicans thought the
market was going to go down when
President Obama was elected.
I know a lot of Democrats thought the
market was going to go down when
President Trump was elected, but in
fact, the market went up both times.
So if you're biased, you don't know
what the outcome is and you don't have
the markets going to react based on
that outcome. You really shouldn't make
an election bet. The 2020 election is
also likely to be very different from
any of the past elections.
Given the state of the economy
suffering from a national pandemic.
I think investors usually think about
the economy as being the most important
thing when it comes to investing.
But the truth is that the fate of this
economy depends upon the virus itself.
Until we control the pandemic, we will
not have a healthy economy.
So I think as people think about
investing, think about voting, the most
important thing is how do you deal with
a pandemic? Because if you can deal
with pandemic, get past the pandemic,
then the economy will recover and that
should be good for portfolios.
The outcome of an election can have an
entirely different effect on different
sectors, making predictions for future
market performances that much more
difficult. The gridlock in Washington
and the results could also have a
different impact on the market in 2020,
as many sectors are counting on more
stimulus during the pandemic.
Health care is going to be huge in this
election. It's just how the results
will determine the future of that
sector. It's anybody's ball game right
now. But after the election is over,
you'll see investors really start to
put their chips on the table in terms
of where they think the future is going
to go. Success will ultimately depend
on how much risk an investor is willing
to take. And, of course, the more risk
tolerant person will invest more in
stocks and reap the benefits, and the
more risk averse people will perhaps
stay more on the sidelines and
potentially miss the game as a result.
I think as an investor, during a time
like this, you want to make sure you've
got your bases covered.
So it really is some of the old time
diversity and those kind of things.
Remember, any timing decision when it
comes to investments really means you
can make two good calls, you know when
to get out and you know when to get
back in. And I've never met anybody who
can consistently make one good call on
that. So I would think that the right
thing to do is think about where you
want to go in the long run. What do you
try to do with the portfolio?
Think about valuations and place your
bets accordingly and try not to try and
time investments around an election.