Elections and The Market
“The only title in our republic superior to that of President is the title of Citizen”
– Lois D Brandeis (U.S. Supreme Court Justice)
There’s no question this year has been a crazy one. But it’s about to get even crazier as we are on the verge of the presidential election. This is a time when Americans take a few minutes out of their day to choose the next President of the United States. Under normal circumstances, voting is a simple, uncomplicated act. This year though, it is anything but. This campaign season has been different than anyone we have ever experienced, and my office has been receiving many calls and emails from worried clients from all sides of the political spectrum. If you’re like me, you probably don’t enjoy the campaign process, but you also know how important and necessary it is. Being an informed, engaged citizen is crucial to maintaining the stability of our Republic. That means asking some pretty tough questions, like: “Which candidate best represents my opinions and values?” “What will each candidate do to ensure both our safety and our personal liberties?” Getting the answers can be both frustrating and time consuming. At a time when there is so much uncertainty to deal with, the thought of adding an election to the mix can seem overwhelming. So, I thought I’d write about how we should prepare for the aftermath of the election. What exactly does this election mean for the markets?
Short-Term View: Prepare for Volatility Uncertainty.
That’s the keyword. Investors hate it, the year has been full of it, and a presidential election just brings more of it. This election cycle has many uncertain elements around it. Covid unfortunately has not gone anywhere, doubt about election integrity can be found on both sides, and there’s still a stimulus bill that is being negotiated with no success. But there’s another reason why we should prepare for volatility: The possibility of delayed, or worse, disputed election results. Thanks to the pandemic, more people are likely to vote by mail than ever before. Mail ballots take longer to count than traditional ones, and some states will count ballots that are delivered after the election if they are postmarked by a deadline. I have even heard rumors that the election could take a few days or even a few weeks to determine. That would certainly be a bad look for our electoral process and could lead to civil unrest and market uncertainty. Any delay in the election results may well cause more uncertainty, which could trigger volatility. If the losing candidate feels there is ground to contest the results, that could delay the process even further, leading to even more volatility.
We don’t have to look far back in history to see what the markets did the last time results were delayed. Remember the drama surrounding the 2000 election? On election night, Florida’s results were considered too close to call. Over the next month, Americans learned more than they ever wanted about things like dimpled chads and butterfly ballots. The S&P 500, meanwhile, dropped over 8% between election day and December 15 when the result was finally decided. Now, none of this is to say that election volatility is guaranteed. We should prepare ourselves for volatility because the more mentally prepared we are to weather short-term uncertainty, the better equipped we are to remember that patience is better than politics and the market will go up in the long-term.
The Long-Term View:
In 2016, the polls were pretty clear and we mostly expected the same results on election night. I remember several clients calling me the day after election day telling me to reallocate their accounts based on the surprising election results. I totally understand why people think this way too. After all, politics play an increasingly large role in our daily lives. Why wouldn’t they impact our portfolio, too? But the truth is, presidential elections are relatively unimportant when it comes to the markets, at least in the long-term. Historically, the market will go up on average under both Democratic and Republican administrations. One thing I’ve noted in recent years is that as elections get more partisan, so too does the rhetoric about how the candidates will impact the markets. In the lead up to the 2012 and 2016 elections you could find many articles as to why Barack Obama and Donald Trump were going to tank the markets, but as you know the stock market did very well under both administrations. Doom and gloom is predicted more and more with each election and yet the markets keep going up over time.
This is exactly why we are long-term investors. As the saying goes, it’s not about timing the market. It’s about time in the market. This is why making investment decisions based on politics just doesn’t make sense. As you already know, emotional decision making has no place when it comes to investing. But few things prompt as much emotion as politics. That’s why it’s crucial that we keep politics out of your portfolio. It's true that Trump and Biden have different economic policies, and some of their policies will affect the markets to a degree. But far more important are supply and demand, innovation and invention, mergers and acquisitions, the ebb and tide of trade, and a host of other economic developments both large and small. So, what does the election mean for the markets? In the short-term, potentially a lot. In the long term, probably not much.
After what happened in 2016, we do not believe any of the polling data that is coming out today. There are far too many variables and incentives to mislead. Instead we take the approach that there is a 50% chance the White House will be Red or Blue. There is the presidential election as well as the elections for the House and Senate. It is possible that White House goes red or blue and the house and senate are different. For simplicity sake, I will run through what the Republican agenda for the stock market looks like as well as the Democrat. I will note that it is not my job to tell you how to vote. It is more than likely you already know who you are voting for, I just want to give a simplistic and neutral perspective on the policies we could see regarding the potential outcomes.
If Democrats are the winning party, we can expect to see a lot of fiscal stimulus and potentially a reduction in existing tariffs as Trump’s trade war with China will be tampered down. These policies would be bullish for the market. The Democrats would also be likely to enact more regulations, especially as it pertains to social issues and environmental concerns. There is also the likelihood that Trump’s tax law will be modified or eliminated and taxes would go up. These policies would be bearish for the market.
If Republicans are the winning party, we can expect to see some fiscal stimulus but not quite as much as the Democrats would propose. We would also see taxes stay the same or even be cut. Same thing with regulation, it would stay the same or even be cut. There would be a continuation of what we currently have and that is bullish for the market. Republicans would however continue the trade war under Trump and tariffs are generally bearish for the overall economy.
This is a very basic synopsis of both parties and their economic policies. There are obviously many more variables and factors at play that we could talk about all day. But overall, the general trend is that both parties will have bullish policy as it pertains to the stock market, they just have different ways of getting there.
Federal Reserve Policy
I have written and spoken a lot this year about the Federal Reserve and their policy of easy money and low interest rates. The Federal Reserve arguably has more influence over the stock market and the economy than our elected leaders do. The Federal Reserve stimulated the way out of the last economic crash in 2009 and they have done so again in 2020. Additionally, they have signaled they have many more tools at their disposal if we were to see another economic downturn. Interest rates have been near zero for a long time and Jerome Powell, the Federal Reserve Chairman, has indicated that they will continue to stay low. Our office believes that we are still in a bull market and that we will see a continuation of asset prices increasing (think inflation). The market today actually reminds me a lot of what we saw in the 1990’s when we had a bull market that eventually ended in the “dot-com bubble.” Back then, the Nasdaq soared 390% from mid-1996 to its peak in early 2000. That was when asset prices were hot and we actually saw the Nasdaq jumped 109% in the last 12 months of that boom.i On Monday, October 26, the stock market experienced its most dramatic slide in several weeks. The Dow and S&P 500 both plunged around 2%.ii On Wednesday, October 28, the markets fell even further, to the tune of 3%.iii When you boil it down, market volatility has always been about fear. Of course, fear can manifest itself in many ways. Fear of loss, for example, often leads to market meltdowns. (We saw this in March.) Fear of missing out, on the other hand, can lead to “melt-ups”, when the markets rise sharply even if the overall economy is on shaky ground (We saw this in the summer.) And after this election its possible we will see a melt up due to fear of missing out again as many investors are currently sitting on cash and waiting for it to be “safe.”
2020 has been a long, crazy year. It’s possible the next few months could be even crazier. But in the grand scheme of things, they are still just a few months, and this is still just one year. We’ll be investing long after Trump and Biden are both names in the history books. In the meantime, always remember that my team and I are here for you. We’re happy to review your portfolio, answer your questions, and address your concerns. Thank you for the trust you’ve placed in us, and please let us know if we can ever be of service. Be well and enjoy the rest of your year! Sincerely,
Bruce Carlson, CFP®
Carlson Asset Management
i “A Melt Up Is Never a Smooth Run Higher” Dr. Steve Sjuggerud Stansberry Research 2020
ii “Stocks Slide on Coronavirus Uptick, Fading Stimulus Hopes,” The Wall Street Journal, October 26, 2020. https://www.wsj.com/articles/global-stock-markets-dow-update-10-26-2020-11603706439?mod=hp_lead_pos1
iii “Dow drops 800 points on mounting concerns over the coronavirus and the global economic recovery,” CNBC, October 28, 2020. https://www.cnbc.com/2020/10/27/stock-market-futures-open-to-close-news.html
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.