November 3, 2020

Dear Mr. Market:

November 3rd is looming large in many minds this year.  That’s right, it will be Dolph “Ivan Drago” Lundgren’s 63rd birthday!  Big news for sure, but unless you’ve been living under a rock, you know we also have a presidential election to decide.  

We know one of these three will be celebrating November 3rd.  How about the other two?

Okay, you may not be celebrating the great movie villain that day, but hopefully you do have a plan for voting.  Many investors are wondering if they need to have a plan for their portfolios, either leading up to or following election day.  There are interesting market factors to consider around election years, but are they compelling enough to act on?

In the most recent edition of “the Guide“, we focused it much on how the election will potentially pan out and what “Mr. Market” has done in years past as well as how that could play out in this very unusual environment. Click here to view the newsletter.

ELECTION & INAUGURAL YEAR PATTERNS

Stocks typically do well in a presidential election year, finishing positive about 74% of the time.  That sounds encouraging, but how does the winning party influence market performance?  

Exhibit 1


Election YearInaugural Year
Democrat Winner7.6%16.4%
Republican Winner15.2%2.7%

Source: Slickcharts.com, as of 10/16/2020.  S&P 500 Total Return, 12/31/28-12/31/2017

The market tends to do better in years when a Republican is voted in, but that balances out a bit when the calendar flips, as inaugural year returns favor Democrats.  What about when we get a newly-elected Democrat, or a re-elected Republican, as will happen this year?

Exhibit 2


Election YearInaugural Year
New Democrat-2.7%22.1%
Re-Elected Republican10.7%2.8%

Source: Slickcharts.com, as of 10/16/2020.  S&P 500 Total Return, 12/31/28-12/31/2017

The averages follow the same pattern, but what causes this trend?  It might be that the market traditionally perceives Republicans as good for business and Democrats as anti-business.  In the runup to and immediately following the election, investors try to price in what candidates’ agendas may mean for the economy.  So it stands to reason that when a Democrat wins, investors might feel less optimistic, causing returns to be less than the long-term average.  

But how to explain inaugural year turnarounds?  It comes down again to what candidates promise (or threaten, depending on your viewpoint).  Both Republicans and Democrats spout ambitious, sweeping ideas while campaigning, but the reality is both either moderate once in office, or run into gridlock trying to work with Congress.  The market realizes both the hopes for the Republican and the fears of the Democrat were too high, so there is a bounce back.  Think back to 1992, when many feared Clinton’s healthcare proposals, or 2008, when people worried about Obama’s healthcare plan.  Clinton’s plan was abandoned, and Obama’s lost some of the controversial components it originally had.

DISPUTED ELECTION RESULTS

Many observers worry this year’s contest will not be settled on election night, with speculation that the losing side will protest the results.  Think back to 2000, when the Bush/Gore vote was not decided until December 12 – who can forget about the “hanging chads” on Florida’s ballots?  Most investors accept that the market does not like uncertainty, so how did it do between that year’s election and when we confirmed the winner?

Exhibit 3

The market dropped by as much as 8%, and ended down almost 5% by the time the Supreme Court ruled and Gore conceded.  Not a fun drop in such a short time, but would taking action in your portfolio have been worth it?  Not likely, unless you were a trader instead of long-term investor.

STOCKS TO OWN BASED ON THE WINNER

As sure as we have presidential elections every four years, we also have the media and analysts touting which stocks will do better under which candidate.  A quick internet search of “stocks if Trump wins” or “stocks if Biden wins” gives you long lists for each.  A bit more research of past elections shows general beliefs that energy and defense should benefit from a Republican winner, with technology and alternative energy getting a boost from a Democrat.  The results of these ideas are decidedly mixed, and the obvious choices often don’t work out.  Think of coal and energy companies being touted back in 2016 if Trump were to win.  Since November 2016, energy exchange traded fund XLE is down 57%, coal exchange traded fund KOL has dropped 41%, while the S&P 500 is up more than 61%.  When Obama won in 2008, the play was supposed to be alternative energy stocks.  From November 2008 to November 2012, alternative energy fund ICLN fell almost 72%, while the S&P 500 rose over 46%.

CONCLUSIONS

The ideas presented here admittedly look back at history, which is rarely a perfect guide. Conditions are never exactly the same; for example, the disputed 2000 election happened during a terrible bear market, and today’s market is actually in much better shape. You can also find individual instances that went against the election year/inaugural year trends. But looking at how the market has reacted in similar environments at least gives you perspective when faced with what may seem like an unprecedented situation.

The takeaway here is that elections should not influence your long-term strategy. They can cause anxiety and high emotions (maybe more this year than usual!), and making a big bet based on emotion is never good advice. As always, having a well-constructed portfolio strategy should survive the high emotions of a campaign, even if you have to ride some volatility in the months leading up to and following November’s big day.

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