The stock market and elections

A review of market data for the S&P 500 going back to the 1930s revealed that certain patterns emerged over those 90 years. Stock and bond markets showed more muted performance in the year leading up to a presidential election than they did at other times. When a new party comes into power, the stock market gains averaged 5 percent. When the same president is re-elected or if one party retains control of the White House, returns were slightly higher, at 6.5 percent.

Who is elected president is just one factor to consider. Given that control of the Senate is key to bringing about real changes in policy regarding taxes, spending and regulation, if Democrats take the Senate in the 2020 election, it could result in short-term market impacts. A Democratic sweep would have even more of an impact if Senate Democrats were to succeed in eliminating the filibuster rule, allowing bills to pass with a simple majority.

If there is a sweep, the possibility of significant market impacts increases. Right now, a Republican sweep looks extremely unlikely, and the chances of a Democratic sweep have steadily grown.

The ongoing uncertainty of COVID-19

COVID-19 has been a major question mark hovering over the upcoming election for much of 2020. The pandemic continues to challenge many industries, and a path back to normal  or a new normal remains unclear for many businesses.

If the number of cases goes down, consumer sentiment, economic recovery and job growth would likely follow, which could boost President Donald Trump’s re-election bid. On the flip side, if COVID-19 numbers continue to rise, or if the labor market does not see recovery, that could aid former Vice President Joe Biden’s campaign. Regardless, without a clear plan from the federal government for combating the spread of COVID-19, the market will see ongoing uncertainty.

Then there is COVID-19’s impact on the election process itself. The prevalence of the virus means that the number of mail-in or absentee ballots this year will likely far exceed historical averages. Because counting these ballots may be time-consuming, and because the system is largely untested in some states, there may be no clear winner on Nov. 3 or even for days or weeks after Election Day.

Markets do not like uncertainty. If there is no clear winner on Election Day, it’s a good bet that the stock market will experience some short-term volatility.

How the election and both candidates policies could affect a few key sectors and issues

• Healthcare. That sector often shows increased volatility leading up to a presidential election. This year, the effects felt on healthcare companies will depend on election results. If the Democrats sweep, many anticipate a tougher stance on drug prices, a position that may put pressure on the pharmaceutical and biotechnology industries. In addition, the policy of former Vice President Joe Biden that departs most dramatically from the status quo is a public option for health insurance. A Biden win might signal future uncertainty or even weakness in the healthcare sector. With that said, weakness in healthcare may be a buying opportunity given increased government intervention for insurance policy changes in the past.

• Technology. The fate of large technology stocks appears marginally tied to a Biden win. With a Trump win however, regulatory action could intensify in his second term. The Trump Administration Justice Department is preparing to launch antitrust action against several large tech companies. Democrats may take similar actions, although their approach would likely be less stringent.

• Trade. More than any other policy issue, trade is the one worth watching. Trade policy will not only be affected by who occupies the White House, given the wide-ranging trade powers granted to the executive branch, but also whether the Senate remains in Republican hands, because Congress has the authority to approve new trade deals. Additionally, Biden and Trump have largely divergent approaches to trade and the issue of engagement or confrontation with China. For example, Biden has struck a much less confrontational tone and would likely seek to change China’s trade practices through international diplomacy and multinational organizations like the World Trade Organization, instead of the Trump Administration’s largely unilateral approach.          

• Taxes. If Biden becomes president, he has promised not to raise taxes on individuals earning less than $400,000 annually. He does plan to increase taxes for individuals earning more than that figure, but some of the specifics make his tax plan less progressive than it initially appears. Higher income taxpayers will likely be regaining the full state and local tax (SALT) deduction under the Biden plan, currently capped under President Trump’s 2017 tax law. The return of the full SALT deduction could offset a substantial part of the proposed tax increase for those living in relatively high-tax states such as New York, California and Minnesota.

There are several other issues, like the legalization of Marijuana which will be directly on the ballot in 5 states and the future of the fossil fuel industry.
When it comes to corporate taxes, Biden would need a Democratic Senate to enact his plan to raise the statutory corporate tax rate to 28 percent, up from the current 21 percent. But let’s not forget, the unity currently displayed by the democrats only exists to oust the current President and will fade quickly after the election.

So how does that affect you and your portfolios 

Once the election is over, a re-evaluation on how the policies that are championed by newly elected officials could affect the global economy is certainly necessary. It is important to have all the components of a diversified portfolio in place, and then create and stick to a longer-term strategy.

Keeping an eye on which sectors are most likely to be affected by the presidential election, like healthcare and technology is necessary. But there’s no need to panic about market volatility during election season. Increased volatility has become more common in the investing landscape, even without the upcoming election. And it’s not necessarily bad news, especially not when the economy is otherwise sound. Uncertainty that causes prices to move widely, may also create opportunities to buy equities. Any volatility could be used to meet long-term goals at a better price that can potentially provide better than average returns over time. The ‘Bucket System’ I started using for some of my clients, will reduce some of these risks and take advantage of opportunities.

While the drama of this presidential election can make your imagination run wild, what’s important is how policies will affect the domestic and global economies. Returns are made over a full business cycle, which is longer than one presidential term. With presidential elections, it’s important to have all the components of a diversified portfolio in place, and then stick to a longer-term strategy that’s designed for more than one election cycle.