Visionary’s Educated Investor – Investor Implications of the Presidential Election – Visionary Wealth Advisors

Visionary’s Educated Investor – Investor Implications of the Presidential Election

John Fischer, CFA®, CFP® | Chief Investment Officer
November 19, 2020

In the weeks leading up to the presidential election, investors braced for impact. If history could serve as any guide, it seemed reasonable to expect some turbulence.

In the three consecutive presidential elections before 2020, stocks fell by more than 1% the day after the election was called. This time around, investors feared a lack of a clear or definitive election result on the night of November 3rd would cause even greater market chaos, similar to what happened in 2000.

In addition, some pollsters predicted not just a Biden victory but a “blue wave” of Democrats consolidating power in both the White House and Congress. That, in turn, led some investors to fret over the market reacting unfavorably to the threat of significant policy changes under a new administration.

But it seems that investor fears were largely overblown.

Although we’ve seen market volatility, stocks seemed to care more about the news of a highly effective Pfizer COVID-19 vaccine than election drama; the market rallied by 5% intra-day last week upon hearing the company’s experimental drug might be more than 90% effective.

And while we experienced record voter turnout, the anticipated blue wave did not materialize. It currently looks as though Republicans may keep a majority in the Senate and Democrats will control the House.

That balance of power suggests a lower probability of sweeping legislation, which could be beneficial for financial assets, at least in the short-term. Markets like certainty, and with the potential for legislative gridlock, the status quo is oftentimes the base-case scenario.

With the election now behind us, let’s discuss some of the key policy agenda items that President-Elect Joe Biden campaigned for, how those policies may be altered with a divided Congress, and how markets might respond.

The Impact on Taxes
During his campaign, Biden proposed raising the tax rate for businesses and wealthy individuals if elected. With a divided Congress, a Republican-controlled Senate has the ability to veto proposed House legislation for higher corporate or individual taxes. As a result, we’re unlikely to see an increase in the corporate tax rate or substantial increases in the personal income tax rate, which is a positive for corporations and the U.S. economy.

The Potential for Fiscal Stimulus
Members of Congress have attempted to negotiate a second COVID stimulus package over the past few months, but Republicans and Democrats have not been able to come to an agreement – in part because neither wanted to give the other party a perceived win leading up to the elections.

Democrats have been pushing for a much larger package than Republicans, so investors assumed a blue wave would eventually lead to a more robust fiscal stimulus bill in 2021. With a divided government, however, we’ll likely see a smaller stimulus package (and lower deficits) if and when an agreement is reached.

Such an outcome would result in less financial relief for individuals, businesses, and local governments, which would be a negative in the short-term for markets.

The Future of Trade and International Stocks
With Biden’s victory, it’s expected that the U.S. relationship with its international trading partners and associated tariffs will likely soften and be more predictable, although there seems to be bipartisan support for a continued tough stance against China.

Such a development would be positive for international developed and emerging market stocks given the buying power of the U.S. In addition, the economies of most countries rely on trade much more than the U.S. economy does, so increased U.S. imports would also help foreign currencies relative to the U.S. dollar. That could provide another tailwind for international stocks.

The Prospect of Regulation
Leading up to the election, there were concerns that a Democratic consolidation of power in the federal government would equate to sweeping reforms in several sectors. Technology stocks, communication services, and healthcare stocks all handily outpaced the S&P 500 index after Election Day on the expectation that a divided government and Republican-controlled Senate will prevent such reforms that might have aimed to break-up big tech firms and initiate more progressive legislation for health care companies.

Is It Time to Trade?
Now that you understand some of the market trends that we may see following the elections, you’re ready to adjust your portfolio accordingly, right?

While the cases may seem compelling to do so, investors would be wise to take a look back at what happened in 2016. If you tried to follow a similar strategy and react to trends that seemed to emerge immediately after the election that year, you might have been less than pleased with the results.

In the chart below, you can see what returns for certain sectors looked like immediately following November 3rd, 2016 — and where annualized returns for these same sectors ended up at as of this Election Day:

In the three days following President Trump’s election, financials were the best-performing sector. Investors expected financial stocks to benefit from fewer regulations and higher interest rates, which stemmed from Trump’s pro-growth policies of lowering taxes and increasing spending.

But with the benefit of hindsight from our position in 2020, we can see that financials were the third-worst performing sector in the list here and they vastly underperformed the overall market.

Industrial stocks were another strong performer the week of Trump’s election, based on the expectation of a massive infrastructure deal. While the sector did see modest growth, it may have been tempered by the fact that the deal never came to fruition.

And while technology stocks have been on fire lately, they actually underperformed the S&P 500 by 2+% in the three days following the 2016 election on the concern of higher interest rates due to Trump’s pro-growth economic policies. The tech sector’s standout performance in recent years is the market’s worst-kept secret, outperforming the next best sector by 8% annually and the S&P 500 by 13% per annum.

Finally, following Trump’s election, investors sold bonds as the U.S bond benchmark fell by more than 1% on worries that Trump’s economic policies would stimulate economic growth. The reasoning suggested this would cause inflation with interest rates rising and bond prices falling. That expectation proved to be false as interest rates actually declined during Trump’s term, providing a solid 4% annual return for bond investors.

The White House Administration May Change, But Your Investment Strategy Probably Shouldn’t
These unexpected market outcomes over Trump’s full term are a reminder that much can change between the time a potential president makes promises on the campaign trail, and years into their term in office.

Sometimes, the policy priorities of the president change once in office. Other times, policy expectations are altered due to the fact that our government is designed to be a checks-and-balances system to limit the powers of any one branch or political party. And frequently, market consensus on expected outcomes is just plain wrong (much like the prediction that markets would fall if election results were delayed this year, which proved to be incorrect).

In the past, I’ve written at length about the dangers of our human bias towards action (i.e. we have to do something) as well as how investors can win more by losing less. These market outcomes from the last presidential term should serve as a word of caution for investors who feel they must do something or that they should chase the latest and greatest market movements. After all, as Mark Twain said, “what gets us into trouble is not what we don’t know. It’s what we know for sure that just ain’t so.”

 

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