Reading the Market preceding the 2020 General Election

Tobi Morrow

The impending November election has investors scrambling to read the market in an unpredictable flurry, when historically, the market doesn’t seem to care what candidate takes office. Post election, summed up by Yale Hirsh’s “Presidential Election Cycle Theory”, we tend to see the stock market slightly lower for the following year (before a surge in the third year), and bonds tend to slightly outperform. When the same president is reelected or the party remains in control, analysts have found returns to be slightly higher at about 6.5% than when new parties reside at about 5%. 

But who does the market prefer? According to Brian Kraus, head of investment consulting at Hartford Funds, since 1933, Democratic presidents typically preside over a higher U.S. equity market than the Republicans. And when we take away the years of President Bill Clinton, there is practically no difference in equity market returns. In this year, we can expect a few options: Either President Donald Trump is reelected and Congress remains split, Joe Biden wins with a complete democratic sweep or he wins over a split party Congress. In the first scenario, according to Stephanie Link, chief investment strategist and portfolio manager at Hightower, a wealth management firm, we can expect rallying from small companies, while sectors like traditional energy, financials, and technology also are expected to perform well. If Biden wins and there is a Democratic sweep in Congress, the market is expected to sell off because of his tax proposals. Unless a COVID recovery is released, it will be difficult for Biden to go through with his levies. However, what we are seeing from Biden’s tax proposals are not something new to what we’ve seen from other democratic candidates. Under this option, Pharmaceutical companies and FAANG (Facebook, Amazon, Apple, Netflix and Alphabet) stocks may underperform while infrastructure, clean energy, and health-care services may do well. Link proposes that the best market option is if Biden wins and the congress stays split between Republican and Democratic control. This is because although people believe the market performs best under Republican control, statistics show better performance under a divided government (See Chart). Higher taxes accompany higher spending that stimulates the economy, which we saw with Trump’s administration when he increased spending to stabilize the economy. In actuality, the risks that accompany Biden’s election may be more at the hands of the public’s reaction.

Political issues are more sector focused, which is where analysts have found the most change. The 2020 candidates have proposed a wide range of reforms, and the volatility of the market is ultimately up to whoever takes office. However, volatility isn’t something to fret when it comes to the election because it isn’t always bad. It can help you make your long term goals at a better price because “If it’s uncertainty that causes prices to move widely, then that may also create an opportunity to buy equities,” says Tom Hainlin, national investment strategist at U.S. Bank. 

This year’s election amid the pandemic may fabricate more uncertainty, but not to a point of concern. Rob Haworth, senior investment strategy director at U.S. Bank, points out that the best way to combat the uncertainty is to “make sure to have all the components of a diversified portfolio in place, and then stick to a longer-term strategy that’s designed for more than one election cycle.” Short term, the general election can reveal some real market winners and losers, but there is little difference in the long run, which is why maintaining a calm response is key to investing around the general election. The same for this year’s election, expect unpredictability, but like always, keep your interest in the long haul.

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