Trump vs Biden. Republicans vs Democrats. The result of the election on 3rd November in the world’s biggest market, America, is sure to have an impact on your investments.
In fact, it’s in the top 3 most cited risk factors to global stock valuations, alongside the coronavirus and a tech bubble pop.
We got a taste of the market jitters to come last week when President Trump tested positive for Covid-19. The S&P 500 and the Dow both lost 2% per cent, and oil prices also slipped further into the abyss.
What the market is hating on here, is uncertainty. Stocks don’t have a party affiliation, they don’t really care who the president is. What they like is stability, and the right market conditions to grow and thrive.
Here we’re sketching out an objective view of what November is likely to look like in the stock market under either president, without political bias, and most importantly – how it impacts your money.
How Politics Shapes Stock Markets
Politics impacts the stock market in 2 key ways – firstly, it is a headline grabbing source of uncertainty, which the market hates above all else; and secondly, the ideologies of the people in power affect which laws get passed, which either help or hinder companies to prosper and grow profits for you, the shareholder.
The ideal market conditions for your stocks and ETFs to grow is under a free market with just the right amount of regulation, and just the right amount of taxation.
Too much or too little of either and you run into problems, but a new president usually tries to make sweeping reforms in the opposite direction of their predecessor.
How Investors Are Thinking
The vast majority of investors — 93% — expect the result will affect the stock market, according to a recent survey from asset manager Hartford Funds. 84% said this will impact their investing habits.
There is a lot of emotion around this election; understandably, given how the culture wars have split the country in two, and this emotion is leaking into the stock market.
45% of investors surveyed said they plan to make changes before the election, and 62% indicated they would be waiting to make changes after the fact, once the dust has settled. Who is right?
Uncertainty and Volatility
We’ve already seen buckets of volatility in 2020, which has been fantastic for traders, but perhaps more gut wrenching on occasion for long term investors. Here’s what Winter has pencilled in for your portfolios:
- 3rd Nov 2020 – The US Election
- 1st Jan 2021 – Proper Brexit happens, with either a Deal or No Deal
- Probably every week to come – a coronavirus development
Needless to say, uncertainty is the only thing which is certain. We’ve discussed before how to invest around Covid, and Brexit is a matter mainly for EU and UK stocks.
The upcoming battle which will have the largest predictable effects on US stocks is the election.
If Trump Wins Again
Major polling outfit FiveThirtyEight were among the only pollsters in 2016 to give Trump decent odds of victory, but even then, they only gave him around a 30% chance.
This time around they again have the Democrat candidate as most likely to win, but are still giving Trump around a 1 in 5 chance – which isn’t zero. And remember how barely any pollsters thought Brexit stood a chance in 2016?
If President Trump pulls off a blinder and defies the polls again, the market would probably quite like it. It would mean stability, and more of the same.
Even industries that may conceivably fare better under a Biden premiership would at least be able to carry on as before, with no material changes.
Small-cap stocks would likely rally on the news. These tend to be the most negatively impacted by market volatility, and even by the anticipation of market volatility.
The fossil energy sector is likely to do well – relatively speaking, that is, as it’s doing pretty poorly right now.
Trump’s White House is very pro-American oil, while Biden has promised some very green policies sure to upset the oil companies.
Big Tech would also be poised to keep doing well under Trump. While the tech giants have been threatened with tighter regulation under the Trump regime, Biden and the Democrats are expected to take a much firmer hand in what they see as bringing Big Tech under control.
Tech companies are very capable of growing and innovating if left unhindered, so less regulation is a good thing for the shareholders of these stocks.
One thing you can expect under a Trump presidency is a brake on global growth overall. His famous “America First” policy and rhetoric against China is sure to hinder trade between the nations of the East and West.
For shareholders of American stocks, the ones poised to perform best under Trump are those with a mostly American presence.
Global companies floated in New York will continue to be hindered by the war of words with China.
If Biden And The Democrats Win
If Democratic presidential nominee Joe Biden wins, and there is also a Democratic majority in Congress – elections happen there at the same time – then things change… bigly.
Rapid and wide-ranging economic reforms happen when a new president enters office, if they are also backed up by their own people in Congress – which is the equivalent of the UK’s Parliament. The elections for Congressmen and women are also happening on November 3rd.
Under this scenario, deemed the most likely outcome by the pollsters, the market will probably sell off.
Wealth management firm Hightower think this could be by around 4%, mainly in anticipation of Biden’s tax policies, but we wouldn’t be surprised if the sell-off were even higher, given the fear in the markets and other elements in play that cause uncertainty like Covid.
Initially, Covid-19 will make it difficult for Biden to ramp up taxes on already-struggling companies. Unless there is a vaccine, we think these policies are likely to be deferred into 2022.
But the specter of tax rises will hang over the markets and continue the sense of uncertainty about just when exactly the hit will come.
If there is a dip after the election, we will likely buy into it.
A result for Biden is a result you can take advantage of. While it is likely to cause your existing stocks to fall in the short term, this isn’t an issue for long term investors.
But if we see a big fall on November 3rd, we will be drawing on a chunk of our cash war-chest to buy that fall. We won’t use it all though, as there is still a possibility of bigger dips in the future from Covid.
Specific companies expected to do the worst from a Biden victory include pharmaceutical companies and the FAANG stocks – Facebook, Amazon, Apple, Netflix and Alphabet.
Big Pharma is viewed with just as much distrust by Biden’s team as Big Tech, with both of these sectors likely to take a hit from increased government regulation.
But if there is a Democratic sweep of both the presidency and Congress, sectors like clean energy and industrials could benefit from a new focus on infrastructure.
A big part of Biden’s playbook is tax and spend, which includes heavy subsidising of the clean energy industry, with renewable energy stocks like Renewable Energy Group (REGI) set to benefit directly, and some tech companies like Tesla (TSLA) benefitting indirectly from a greater push by government towards battery technologies and so on.
That’s not to say that a tax and spend policy is the best way to drive innovation – we generally favour the free market approach over government subsidy.
But we’re all-for governments using their resources to help technology to advance – if that technology has a practical economic use.
America Selects Their 2 Greatest Fighters
So, of the 330 million citizens of the United States, the 2 most popular were whittled down from the masses, of which the most qualified will become President.
At least, we assume this must be how it works! In any case, it’s not just about these 2 champions of the American people.
We also have the elections for Congress, which we’ve already alluded to, which are just as important for how the stock market goes over the next 4 years.
FiveThirtyEight and most other pollsters have a Democrat win in both houses of Congress as being the most likely outcome, but only just.
Congress is currently split between both parties, each in charge of one of the two houses.
Stock markets love this, because nothing gets done. Remember Trump’s Wall? It didn’t get built, because there was a divided Congress.
For a President to make any serious changes, it needs to be signed off first by the 2 Houses of Congress.
And when both houses are stuck shouting at each other, no laws get passed, and the market is free to do what it does best – make money.
We had a similar brief period of respite in the UK Property Investing market, during the Hung Parliament of Theresa May.
Any new law for Landlords is inevitably a bad one, and our fellow property investors were able to enjoy a year or so without government fiddling.
A Biden victory, or even a Trump one, would likely be met by the markets with a shrug of the shoulders, if it coincided with the result of the Congressional election being another split.
For major change to come, America needs all 3 ducks in a row – the President, and the 2 Houses of Congress.
What Past Elections Tell Us
Even though the stock market has boomed during President Trump’s – a Republican’s – first term, it’s not to say it wouldn’t boom under a president from the Democrat party either.
Dating back to 1933, a Democratic president on average presides over a higher U.S. stock market than a Republican one, despite some of the big hitters being Republicans.
But if you strip away some outliers, such as the dot com bust, there’s practically zero difference between them in equity returns.
According to Hightower, if you’d put $10,000 into the market around any Election Day, 10 years later it would have gained value.
In this, history tells us it is wrong to choose not to invest in America just because you don’t like the president. History tells us it’s wise to invest in America long term regardless of the president.
How The Market is Already Positioned
Unlike the pollsters, the market is too uncertain about the result of this election, and is proceeding with caution.
We’ve seen investment funds taking money out of tech stocks – those most likely to suffer in the short term from a Democrat victory – and increasing their holdings in cash.
We’re positioning ourselves by being ready to buy the dip if there is a sweep by the Democrats, and we are not too heavily weighted towards any of the industries most likely to be impacted by either outcome.
It may be time to take profits on some winners, if you hold stocks in any of the industries mentioned in this video – unless you’re in it for the long haul.
Being undiversified going into this election is a bad idea. Be wary of the sectors most likely to move on either outcome – tech, clean energy, dirty energy, pharma, and infrastructure.
But a properly diversified long-term portfolio has nothing to fear from this election!
How are you positioning yourself for the election? Let us know in the comments below.
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