With a presidential election quickly approaching, one of the most discussed concerns of investors is how the election will affect their portfolios. Historically, predicting how market returns will be impacted by an election has been difficult, and a study of post-election market outcomes doesn’t shed much light on the subject. Movements appear random. We know that short term, markets are unpredictable, regardless of politics, encouraging investors to stay with their long-term investment plans and not make decisions based on trying to predict or time outcomes. Longer term, technology growth, inflation, increased productivity and population growth will drive financial markets higher.
In the short term, government policies impact the markets. Policies that lead to higher taxes, decreases in government spending and increased regulation can create a short-term drag on economic growth, as increased government spending and deregulation can provide a temporary boost. Some industries may become more competitive and some less depending on policy. The U.S. markets could pale or rise in comparison to international markets. You could argue that the Trump tax cuts and deregulation have provided a short-term boost, but they have also increased the deficit which at some point must be addressed, most likely with higher taxes. If that is the case we are pulling future growth into the present in exchange for muted growth down the road. If anything, policy changes create volatility, which is likely as politicians seek to implement changes that fulfill their campaign promises.
A Biden win might make the markets less willing to pay a higher multiple for company profits in the short term and lead to a contraction of PE ratios, increased uncertainty and discounted market prices, as the Trump tax cuts and deregulation initiatives could be reversed. However, if Republicans maintain control in the Senate, it is not likely that much will change in such a gridlocked environment. Political senses are heightened right now, seemingly great divides between liberal and conservative views, and dire predictions of what will happen to America from both sides. But despite all the handwringing, history has shown we have confronted major divides in the past and when the elections are over and the rehetoric dies, capitalism survives and we move forward. In fact, the markets have continued their steady rise since the Great Depression of the 1930s, regardless which party occupies the Oval Office. “This time is different” is something we’ve heard in the past. A new administration is not likely to lead to any significant reengineering of our economy.
More than politics, monetary policy—that is, Federal Reserve interest rate policy—can be a better predictor of stock market returns. There is a greater correlation between accommodative monetary policy and rising stock markets than which party is in office—and the Federal Reserve is aggressively supporting the economy with low interest rates and does not intend on tightening monetary policy any time soon. Interest rates are low and despite recent pandemic-infused volatility, the outlook for the stock market is favorable compared to bonds and cash. The old adage holds true, “Don’t fight the Fed.”
Elections come and go and history has shown that the best returns have been awarded to those who stay with their long-term investment plan despite the what-ifs. History reveals that, like virtually all other years, staying invested during an election cycle results in the best returns.
IMPORTANT DISCLOSURES
The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
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