The Countdown to Election Day
Seemingly every conversation we have with investors turns to a familiar topic; the 2020 election. It feels like the most divisive, emotional election during my life. It makes sense that people are concerned about the impacts. With less than two weeks to go until election day, there are 3 points we believe investors need to keep in mind when thinking about the markets in the coming months.
Finding a winner could take a while
I would hate to be a supervisor of elections this year. Remember the 2000 Florida hanging chad nightmare? The 2020 election has the ingredients for a mess. Voting in 5 states is 100% by mail this year. Four more states mailed ballots to every voter, and 44 states have provided no-excuse absentee ballots. There are no uniform rules between states regarding opening and counting ballots. The election is November 3rd and states must certify their results by December 8th. If 2020 has taught us anything, it is to expect the unexpected. It could take those five weeks, and even more, to find out who our next president is. If that happens, expect short term volatility.
What about a blue wave
Fifteen days before the 2016 election, Clinton was ahead by 5.6 points. Thirteen days before the 2020 election, Biden is up by 8.4 points. As much as we learned not to trust pollsters, the simple fact is that the polls show Biden leading right now. They also show that there is a good chance the Senate could switch hands. It’s fair then to think about what happens in a blue wave. That’s a topic that has covered a lot in recent days (including a really good Schwab article here), so I am not going into fine detail here.
I will highlight a few points, though…
Unless you live under a rock with no news sources (if this is you, bravo to you), you know that Biden’s agenda includes increasing the corporate tax rate from 21% to 28%. It also includes establishing a minimum corporate tax to help limit a company’s ability to find and take advantage of tax loopholes. Obviously, when more goes to Uncle Sam and less stays at the company as profits, earnings take a hit. There are also worries about increased labor costs through a higher minimum wage as well as increased regulation. Those are all potential market negatives under a blue wave scenario.
Not everything under a Biden administration is bad for markets, though.
Despite my dream for a balanced budget and a preference against big government, government spending does push money into the economy and is positive for the markets. As impossible as it sounds, Biden will likely outspend President Trump.
One thing that I think gets overlooked this year is trade. Before the pandemic, trade wars and tariff talks were big drivers of market movement. After the pandemic, trade will likely take on that role again. I expect Biden to be more conciliatory than President Trump, which is also positive for the markets in the short term.
What is proposed in political agendas, and what is actually passable, are not necessarily the same thing. Neither candidate can risk derailing the economic recovery. While I personally do not think a Blue Wave is good for the markets, I also do not believe it is as bad as many people fear (more of our thoughts in our election video here).
There will likely be some offset to the negatives of increased taxes and regulation in the way of increased spending and an easing of trade tensions. We still believe the course of the pandemic, medical advances, and economic recovery will have a more significant impact on markets over the next few years.
There is more to the markets than which team occupies the White House
Pop Quiz Time! We borrow this question with permission from a financial blog site, Some Loose Change. Time to close the textbook, pull out your # 2 pencil and let’s go!
Match the president with the “S&P 500 Index Average annual Return” during their presidency (source: World Bank, Morningstar, and Hartford Fund):
|Ronald Reagan (1981-1989)||A) 14.5%|
|George H.W. Bush (1989-1993)||B) 17.2%|
|William J. Clinton (1993-2001)||C) 15.7%|
|Barrack H. Obama (2009-2017)||D) 14.2%|
Tough isn’t it? The answers look relatively similar. After listening to the news and constant barrage of political ads, that’s perhaps not what we would believe (answers: D, C, B, A).
Put more visually, the chart below from Charles Schwab tells us a similar story.
Chart Source: Schwab Funds
I am not naïve to think that our politicians and their policies do not impact the economy and markets; they do. That said, the long-term trend of stocks, regardless of which team is calling the plays, is up. Many other factors play into the markets’ performance, especially now in the age of a pandemic. I believe the election is important and I do think one team is better for the markets than the other, but I don’t buy the complete boom or bust story dependent on who wins. I am a firm believer in the idea that “nothing is ever as bad or good as it seems.”
The best thing you can do if you are worried about the election, is cast your ballot. A mere 537 votes from Florida ultimately decided the entire 2000 presidential election out of more than 6 million cast. Each vote matters. However, you choose to do it, get out, and vote!
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. The future performance of an investment or strategy cannot be deduced from past performance.