The 2020 Election and Your Portfolio
With 2020’s overabundance of explosive headlines, including a pandemic, an economic recession, and civil unrest, the 2020 Election has been somewhat overlooked until recent weeks. The election, set for November 3rd, is now less than 70 days away. As election news begins to dominate the waves, it is important to look at some potential outcomes and impacts of what could be one of the most consequential elections of our lifetime.
What are the potential outcomes of the 2020 election?
Democratic Sweep
In this scenario, Biden wins the presidential election, Democrats win the Senate, and Democrats retain the House. If this outcome occurs, we will likely see swift reversals of many of the Trump administration’s policies. The most consequential of these is the potential reversal of the Tax Cuts and Jobs Act of 2017. While the impacts of this tax cut are still to be determined, it did lower the corporate tax rate from 35% to 21%. This boosted corporate earnings, which many experts attribute to some of the recent stock market success. Other potential impacts include increased regulation and removal of the filibuster.
Gridlock
In this scenario, Biden wins the presidential election, Republicans retain the Senate, and Democrats retain the House. If this occurs, it will be tough for any long-lasting legislation to be passed. We will likely see Biden advance some policies via Executive Order and increase regulations. However, without control of the Senate, it is unclear how impactful any changes would be.
Status Quo
In this scenario, nothing changes. Trump retains the presidency, Republicans retain the Senate, and Democrats retain the House. If this occurs, we will likely see very few changes. The next several years will likely be focused on economic and pandemic recovery.
Unlikely Split
This scenario is the most unlikely to occur. Trump retains the presidency, Democrats win the Senate, and Democrats retain the House. This would likely lead to the most hostility of all scenarios and could be exacerbated if Trump wins despite losing the popular vote by a significant amount. If this scenario occurs, we may see increased unrest as well as calls to end the Electoral College.
Source: Matt Miller, Clarke Camper, Reagan Anderson. The Capital Group. "Election watch: What the U.S. race means for investors". July 29, 2020.
How will the election impact my investment portfolio?
Long Term Implications
Typically, investment portfolios are built with a goal of long-term growth. According to a recent Thomson Investment study, the party that wins an Election has almost no impact on the long-term performance on an investment.
The chart above looks at the historical performance of the S&P 500 Composite Index over the past eight decades. In 18 of 19 presidential elections, a hypothetical $10,000 investment made at the beginning of each election would have grown. That is true regardless of which party’s candidate won. In 15 of those 10-year periods, a $10,000 investment would have more than doubled. While past results do not guarantee future returns, election-year volatility should not deter investors from maintaining a long-term perspective.
Short Term Implications
While we have already determined that the election does not typically have a huge impact on long-term investments, it is still interesting to look at the short-term trends.
Typically, the concept of the “Presidential Cycle” has held true. Typically, the market underperforms in the first two years of a presidency and overperforms in the final two years. This could be attributed to policies made throughout the presidency to try to improve performance before re-election.
In a study of the last 90 years of the market, US Bank found that, on average, election years underperform non-election years slightly. US Bank also found that it does not make much of a difference which party wins the elections, but rather if it changes hands to the opposing party. They found that, on average, when the presidency did change hands, the following year underperformed years where the same party remained in power.
Conclusion
In general, we believe that keeping an eye on politics is particularly important and part of our responsibility as citizens of the USA. However, for long term-investors, it is important to prevent politics from entering your portfolio. The key is to maintain a broadly diversified portfolio built for the long term.
With that in mind, there are a few sectors we are keeping an eye on. The first sector we are monitoring is Healthcare. Democrats and Republicans have significantly different views on the healthcare industry. Democratic views range from eliminating private health insurance to introducing a public option, while Republican views tend to favor the privatization of the industry. The second sector we are monitoring is Energy. Democrats have some high priority objectives in regards to Climate Change, including a push toward clean energy and more regulation. Republican objectives favor the status quo. This election will likely have both short term and long term impacts on these industries.
We will continue to monitor the 2020 Election and its impact on the markets. If you have questions or would like to discuss further, visit the Schedule A Meeting tab on our website.
Best,
Alex