The US election and your investments

By ATB Wealth 5 November 2020 6 min read

After the close of voting on Tuesday night, results of the US election still hang in the balance as ballots continue to be counted in several key states to determine who will become the next President of the United States. Pundits and investors alike had braced for market volatility to carry into election week, but so far, markets are taking the closeness of the race in stride as stocks headed higher after two weeks of gyrations.

The recent course of the market can be surprising because, as humans, we generally dislike uncertainty and would much prefer to have a good sightline on outcomes so we can carefully plan around them. This natural tendency can impact the decisions that we make as investors. Oftentimes, successful long-term investing requires us to challenge our primal instincts and avoid reacting to our fears prematurely. 

Every year has come with noteworthy headlines that capture the interest of investors, but 2020 has ascended into a league of its own. Earlier this year, we read headlines about trade tensions between China and the US, a targeted missile attack on a US military base in Iran and the retaliation that followed, as well as North Korea actively testing missiles — among others. Then COVID-19 hit and quickly took most of our attention.

Major headlines of 2020 and US market performance
S&P 500 (USD) Jan 01, 2020 - Nov 03, 2020

Source: Bloomberg

Major market events, as shown on the chart above

1. January 3 - US retaliation following Iranian missile strike attack on US military base. 

2. February 1 - Largest locust swarm in 25 years leads to the declaration of a national emergency in East Africa and Somalia.

3. March 2 - North Korea carries out test launch of two unidentified missiles. 

4. Mid-March - Lockdown measures in response to COVID-19 become common across much of North America and Europe. 

5. April 20 - Oil prices turn negative for the first time in history.

6. May 26 - Protests in the US following the death of George Floyd.

7. May 28 - Questions raised about the success of the US China Phase I trade deal after human rights concerns voiced from the US.

8. June 24 - Trade feud between EU and US as Trump administration weighed tariffs of US$3 billion on exports from France, Germany, Spain and UK.

9. July 24 - US daily infections reach summer peak.

10. September 8 - UK Brexit withdrawal agreement faces significant issues and reaching a trade deal with the EU looks increasingly unlikely.

11. October 2 - President Trump tests positive for COVID-19.

12. November 3 - Election results are still unknown.

Each of these headlines shared many similarities — they were negative, involved uncertainty and were outside the realm of our control as investors. In many cases, they swallowed-up a lot of initial attention before fading away as a new headline took the center-stage. Now with the direction of the US election results in the limelight, investors face yet another unknown along with the potential range of emotions that uncertainty can bring.

What should I do with my investments as power shifts in the White House? As frank as it may seem, the best advice for a well diversified investment portfolio is probably nothing, unless you are experiencing significant personal changes in tandem with the results of the election. If not, chances are your financial plan already assumes that large geopolitical events, like elections, will occur over your time horizon and your portfolio is built to withstand market movement that could follow. 

It is natural to want to take action when faced with the uncertainty of a US election and this behaviour is not limited to our investment portfolios. In the early days of the COVID-19 lockdowns, consumers rushed to stockpile supplies such as toilet paper that led to shortages on store shelves. Other consumers then joined in, fearing they may miss out. The result was a self-reinforcing feedback loop which only worsened the situation.

Election results and market history

Major market events such as elections — especially when results are contested or delayed — can precipitate a similar reaction to uncertainty from investors as they digest financial reporting and speculation hits headlines. However, if we associate the success of our investment portfolios with the outcome of every election, we are bound to be making constant changes. As we’ve seen, much can happen in a given year, let alone four. A portfolio that is built to withstand a broad range of policy, lawmaking and other geopolitical events will be the resilient foundation that you need to execute your financial plan and to achieve your goals.

If an investor looked to invest as congruently as possible with the Trump administration from 2016-2020, they likely would’ve pointed to financial and energy stocks, as they were forecasted to benefit most given deregulatory policy that came from the administration. As it turns out, these sectors ended up exhibiting some of the worst US sector performances, precipitated by an event no one could have predicted — COVID-19. When voters headed to the polls four years ago, this event could not have been predicted and would not have been the basis of any one person’s vote. We know in hindsight that the performance of these sectors also cannot be attributed solely to the White House. Therefore, it is an apt illustration of how unknown the future of markets is for all investors, regardless of who rises to commander-in-chief.

Many other instances of unpredictable events can be found over the past few decades. Clinton would not have anticipated the tech bubble in 2000 and George W. Bush would not have anticipated 9/11 nor the Great Financial Crisis to occur during his tenure in office. Despite the political power of the President, there will always be market events that transpire and cannot be proactively planned for. Historically, presidents and political parties have always experienced inconsistent market returns, with the only similarity between presidential terms being that over time the market has typically grown in value. Since 1953 the S&P 500 (the best proxy we have for the US stock market) has returned 10.81% annually in USD terms — but not without bumps as we mentioned along the way.

US market performance under past presidents

Source: YCharts, Forbes (Performance represents price change only in USD. Figure for Truman reflects the Dow Jones Industrial Average)

Staying the course with your investing plan

This long-term growth in markets is what rewards investors for assuming risk and sticking to their financial plans throughout events like presidential elections. Markets have already proven their resiliency in response to the many unexpected shocks over the past year. Since mid-March, the S&P 500 Index has rebounded 50.6% and has a positive year-to-date return of 4.3% as of November 3rd. The unknown results of the US election may bring forth a period of investor uncertainty but this will likely be fairly short-lived and any future economic impact should pale in comparison to the shock of the pandemic.

Ultimately, the companies that make up the stock market will continue to provide goods and services that consumers rely upon. Using history as a guide, these companies will find ways to adapt, innovate and grow under the presiding administration to deliver value to patient investors with a long-term focus.

As this year has shown us, we cannot make accurate predictions around what events may present themselves and what their impacts may be. Instead, our advice to investors is to remain consistent during both the bumpy times and the smooth and to resist giving in to any emotional urges that can lead to making significant changes that can erode a portfolio. Instead, we continue to offer the proven path to investment success that involves setting a long-term plan, using that plan to build an appropriate portfolio and then following that plan through the inevitable ups and downs of financial markets.

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