Election 2020

By: Steven Weintraub

Elections have been part of the U.S. landscape for 232 years. However, Shakespeare wrote the WCF playbook on investment strategies 200 years earlier when he penned Much Ado About Nothing.

To inform our communications on the eve of the 2020 Election we dusted off our 2016 note (summarized below) and had an epiphany…not much has changed:

• There is a gap between candidates’ words and their real intentions.
• Presidential proposals are not always supported by Congress.
• With few exceptions, the stock market goes up in the long run. All presidents, despite different strategies, are incentivized to grow the economy.
• The stock market is an anticipatory mechanism and will bake in expectations well in advance of the vote. To “play” the election would require not only guessing the outcome for President, but also the outcome for both sides of Congress and then, whether the stock market agrees with those conclusions. Quite a few hoops to jump through, all including a fire feature.

With only 39 days before the election, Biden leads Trump in the polls¹ and in the betting world.² The stock market shows no trend that could be associated with any specific outcome considering this exceedingly well-publicized data. Why? Because Congress will call the shots on many economic policies. Because the polls were wrong in 2016 and the outcomes are far from certain.

Betting on the combination of POTUS and/or Congressional races is fraught with risk. However, some truths about elections appear to be consistent.

• Close elections lead to market weakness in the six or seven weeks in advance (Since peaking on 9/2/2020 the S&P 500 has quietly dropped by almost 10%).³ The market dislikes uncertainty and this election is chock-full of mystery including the complications associated with mail-in vote tabulations.
• The market tends to do well after the election as the uncertainty fades.
• Going back to 1900, the stock market has performed better with a Democratic President, but inflation has also been higher. Real returns, net of inflation, are about the same under either party.⁴

Although this pattern can be identified, does that make it actionable? Would we jump out of the market today with an eye toward buying back during the second week in November? No.

Whatever influence government might normally wield will be subordinated to today’s realities that include:

• 8.4% unemployment
• $7 trillion balance sheet for the Fed
• Covid-19

The biggest differences between the candidates may be in their tax and spending policies. These may have some financial planning implications… but we will continue to avoid market timing, select stocks based on balance sheet strength, profitability, and valuation, and remain tax-sensitive on your behalf.

Whatever short-term noise arises around the election, we channel King Lear as long-term investors, “Nothing will come of nothing”.

1. Five thirty-eight composite polls; 9/19/2020
2. Clear Politics; 9/19/2020
3. YCharts; 9/19/2020
4. Ned Davis Research