October 3, 2020 – We are a few weeks out from the U.S. Election, where we will once again cast our vote in a choice between two different political and philosophical paths that lead to two different visions of the future. This time, however, the election feels more fraught and more like an amplifier than at any time in recent history.
Not only is this year’s vote the most contentious in recent history, it is also happening against the backdrop of what may be one of the most tumultuous years in most of our lifetimes. The headlines from earlier this year feel like ancient history and have already been pushed from our memories – Australian wildfires, Brexit, impeachment, Iranian General Soleimani, and the Phase 1 trade deal with China. The COVID-19 pandemic is clearly the greatest concern for the global economy and will be a huge factor in determining who the next president will be.
The upcoming elections won’t necessarily be the determinant of longer-term markets, but they certainly will intensify market jitters in the short-term. Even in the 2016 election, the S&P futures markets predicted the S&P 500 Index would be down more than 5% the evening of the election results, but the index finished out the following day slightly positive. In other words, there will be market moves around the election, but predicting these short-term moves is next to impossible.
What does affect markets in the long-run is Presidential policy-setting and its success or failure at being passed into law. The consensus for Biden is that if he wins, he will raise taxes on the wealthiest individuals and the corporate tax rate back towards Obama era levels. Looking at history, the stock market is not phased when individual or corporate tax rates are raised. His increased taxes are tied to an increase in fiscal spending on infrastructure, ‘reshoring,’ and climate change policy. Enacting these policies would require a “Blue Sweep” in Congress. If Donald Trump is reelected, he will likely face a divided Congress, meaning that little will get passed outside of bipartisan agreement. So, the most likely policy outcome from this election is the continued stimulus to the U.S. economy, something that supports financial markets going forward.
Over time and through elections, we see that the most important thing is staying invested. As the chart above shows, trying to time the markets around who holds the Executive branch is not a valid strategy. The market has risen over time regardless of whether shaded blue or red.
Another important thing is to remain diversified in your portfolio between stocks and bonds and across different and emerging parts of the global economy. Having parts of your portfolio that do not move exactly in tandem with each other helps to smooth the lumpiness of stock market volatility from any one single company or country.
Our final note is that you will be bombarded over the next few weeks with polls and headlines that will drive uncertainty and make you feel as if the outcome of this election will immediately turn the tide on the economy for better or worse. As we have written to you about before, be mindful of the news. Our best advice for dealing with a salacious headline is to pause and head over to the Associated Press or BBC News website to see if the same story is given the same gravity. Remember, the motivation of many media outlets is profit-driven to keep your eyeballs attached and your emotions heightened in the moment. Sane, rational headlines don’t work for that business model.
In times like these, it’s helpful to remember that we have overcome many seemingly unsurmountable obstacles throughout our history. This gives us solace that we will, eventually, get through this challenging time too. As always, we are here to answer questions, serve as a sounding board, and help in whatever way we can.