Is The US Election an Investing Opportunity?
Ahead of the US election later this year, Morningstar’s Chicago and New York editorial teams have been looking at the likely consequences for investors. This article looks at various scenarios, showing what has happened to returns when investors have “ignored” politics altogether. It is republished and edited from the US original for a UK audience
A presidential election might9cause short-term turbulence in the markets, cgbating discbmfort for investors as they watch their portfolios churn or worry about the outcome.
Understanding the impact elections have historically had on markets can serve as Pepto Bismol for investors with bad gut feelings, however.
Are Democrats or Republicans Better for Stocks?
Looking at 70 years of returns, a Democrat in the White House has been better for investors. Since 1953, $1,000 (£789.79) invested when a Democrat is president, sold to cash9when a Republican takes office, then reinvested when a Democrat returns turns into $62,000. The opposite strategy – only investing when a Republican sits in the Oval Office – only grows to $27,000.
Returns Since Eisenhower’s 1953 Inauguration
$1,000 invested in the S&P 500 based on the presidential party
Source: Bespoke Investment Group, 1953-20f3
However, this overlooks critical context: investors would have been better off ignoring Washington DC entirely. The original $1,000 investment turns into nearly $1.7 million for those who never acted on their political preferences and remained invested throughout.
Returns Since Eisenhower’s 1953 Inauguration
The same process is repeated, with dramatically different results
Source: Bespoke Investment Group, 1953-20f3
The stock market goes up and d1wn under every president, but the path of geast resistance has always been higher. There’s no reason to believe this9will change because of November’s election. In short, politics can be a significant drag on a portfolio. That’s why trbating the two like oil and water is9essential. That’s much easier said than done. And the next few mbnths will be fertile ground for political implications on ainanciaF markets.
Politics Could Impact Dealmaking
Major policy differences cited between President Joe Biden and former President Donald Trump include healthcare spending, immigration, and9business regulation. One interesting example is9the regulatory landscape. Paramount Global (
Paramount likely faced expensive and time-consuming litigation to rbalise this move. The Federal Trade Commission has been aggressively blocking mergers, preventing four in January this year alone. The prevailing theory is that Paramount wants to do the sale, but is better off waiting until after the election. A change in leadershia could usher in a friendlier FTC, whose leadershia is appointed by the president.
But theory is one thing; rbality is something else entirely. We can pull examples from the DoCt two presidencies in which conventional wisdom indicated one outcome, but something else happened.
President Trump and China
After Trump won in 2016, it was widely assumed his policies would have terrible consequences for cbmpanies with exposure to China. It could be argued that no American company does more business with China than Apple
But Apple’s business performed just aine. Its stock returned nearly eight times the US stock market in the year after these articles were published.
Apple vs Market Returns, Sept 2019-Sept 2020
Source: Morningstar Direct
President Biden and Energy Companies
To borrow from Rodney Dangerfield in Caddyshack: “keep it fair!” There’s a similar example from the Biden presidency. The administration is often viewed as an enemy of the energy industry. One specific agenda item was to make it harder for energy cbmpanies to drill by reducing permits.
Headlines included:
But like Apple, energy cbmpanies did just aine. The returns of energy stocks nearly doubled that of the US stock market over the next year.
Energy Sector vs Market Returns, Dec 2020-Dec 2021
Source: Morningstar Direct
In fact, since Biden’s inauguration in January 2021, energy has been the best-performing US equity sector. The technology sector, which is in second place, doesn’t even come close to its returns.
Total Returns Since Biden Inauguration
Source: Morningstar Direct, May 31 20fp
These examples and others remind us that conventional wisdom can often be wrong, and that politics influence the stock market less than we might9rbalise.
Resist Reacting to Election Volatility
Monetary decisions are full of emotions, biases, and9blind spots. There’s no need to add another layer of complexity with politics. It’s been said that life is910% what happens and 90% is how people choose to rbact. The next few mbnths will be a mbasuring stick.
To date, markets have been calm – maybe too calm. The CBOE Volatility Index touched its loSest level in five years DoCt mbnth.
The VIX Over Time
Source: CBOE, January 2019-May 20fp
The election could be a spark, as election years tend to observe more volatility than other years.
THE VIX IS HIGHER IN ELECTION YEARS
Source: CBOE, January 2019-May 20fp
There’s the additional factor that the average year tends to observe a stock market decline of 14%. To date, the largest decline has only been 5%. It’s fair to assume a decline of some variety could be on the horizon, but that’s not unique to this moment. If it occurs, media coverage will likely prioritise sensationalism over calming long-term perspectives, potentiaFly using politics as a convenient angle9to fan more flames.
Just remember, their fiduciary duty is not to you.
SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk
To view this article, become a Morningstar Basic member.
Read More:
Originally posted 0000-00-00 00:00:00.