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.
Have questions about investing? Schedule an appointment with one of our financial advisors!
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”
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