American politics has been highly polarized for at least the past 20 years, and often the policy proposals of the two major parties have been significantly different from each other. So, it is not surprising that each side views itself as good for the economy while portraying the other as a looming disaster. With polls expected to tighten as election day draws near, many investors wonder how financial markets might respond to the various possible outcomes.

A quick summary of the candidates and their party platforms suggests that Republicans would continue to promote an environment of lower corporate and personal taxes, reduced regulations, renegotiation of trade agreements and increased re-opening of the economy nationwide. Democrats, on the other hand, have advocated a rollback of the Trump tax cuts, with a particular focus on raising corporate taxes and personal taxes on top earners, and a reversal of deregulation strategies to pursue environmental goals. Former Vice President Biden has also acknowledged that he might close the economy again to fight Covid-19, if recommended by the scientific community.

All of these reveal stark differences in economic proposals that are comparable to the policy changes that were enacted through many previous Democrat and Republican presidential administrations, including the Clinton era, the Reagan Revolution, the Great Society, the New Deal and beyond. We make this point because study after study shows a remarkable similarity in the performance of broad measures of the stock market for Democratic and Republican administrations despite their policy differences. For example, a recent Vanguard article using 150 years of US market history shows an average annual return on a balanced portfolio of 8.2% under Republican presidents and 8.4% under Democrats – a statistically insignificant difference.1

Another study, by Invesco, shows that “partisan” portfolios, held only during either Republican or Democratic administrations, underperform “bi-partisan” portfolios that are held throughout both parties’ administrations.2 The explanation is simple: since the market has tended to perform well under both parties, getting out of the market during one or the other party would generally cause investors to miss out on significant market gains. The big takeaway from both studies is that it is better to stay invested even if one dislikes the winning candidate.

But will all stocks do equally well under either administration? Since Democrats will more likely pursue a “Green New Deal,” companies that focus on renewable energy might benefit more from a Biden Administration than traditional fossil fuel companies. Similarly, President Trump’s focus on national security might benefit defense companies relative to others. Furthermore, both Trump and Biden have advocated for significant infrastructure spending, which would help the bottom lines of industrial firms, such as engineering companies and heavy machinery.

Still, investors are often surprised by a sector’s performance relative to their expectations under a given administration. Many investors expected the Affordable Care Act to be bad for the health care industry, but health care stocks returned an annualized 15.31% during the Obama Administration, compared to 15.99% for the S&P 500 as a whole,3 and defense stocks underperformed the broad market under President Trump. These facts underscore the importance of maintaining diversified portfolios with exposure to broad sectors of the economy, not just the “politically favored” industries. All while staying fully invested.

Election season does present other concerns for stock investors besides the worrisome policies of the competing parties. October, for example, is a notoriously volatile month. Yet, over the past 50 years the S&P 500 has, on average, realized slight gains during the month of October – except in presidential election years. Forbes.com reports that the S&P 500 has actually lost an average of 2.5% during the month before a presidential election.4 This is likely due to the fact that voters get more focused on the election as the day draws near, and often, the polls begin to tighten and uncertainty of the outcome grows. And all investors know that “the market hates uncertainty.”

One source of uncertainty in this year’s election is the possibility that election night will come and go with no clear winner. Due to Covid-19, it is possible that millions of mail-in ballots will be waiting to be counted long after election night has passed. And the armies of lawyers on both sides makes it almost a certainty that this year’s vote will end up in the courts. The recent passing of Supreme Court Justice Ruth Bader Ginsburg only heightens the uncertainty in this respect.

How might such a scenario affect market performance? We can look to the 2000 Bush-Gore post-election battle as a rough guide. During the five weeks it took to declare a winner in that presidential election, the S&P 500 lost 11% of its value. However, a big difference between now and then is that, in 2000, the post-election turmoil was unexpected. This time around, everyone anticipates a messy, legally-charged process of counting the ballots. As a result, those expectations may already be priced into the market.

When all is said and done, our best counsel to our clients is to stay fully invested. If you’ve ridden the recent equity rebound to new heights in your asset allocation, then rebalancing to your long-term targets is wise and appropriate. Otherwise, stay invested, buckle your seatbelts, (Did we mention that November and December are typically good months for stocks in election years?) and enjoy the ride.

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1Vanguard.com, “What U.S. Elections Mean for Investors”

2Invesco, “2020 Election: 10 Truths No Matter Who Wins”

3Ibid

4Forbes.com, “Fasten Your Seat Belts: Markets Could Have a Bumpy Election Season”