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Election 2020: impact on investments

2020-10-11, Michael Thompson

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Polls show that investors are planning to be more active due to the 2020 presidential election. For example, a survey by Hartford funds found 45% of investors are planning to make portfolio changes before the election and 62% in the 12 months after the election. This has prompted many advisors to urge clients to remain calm. What should you do? In this article we’ll provide facts that may help answer this question.

Betting on an election result

Most experts believe that changing your investments assuming a particular candidate will be elected is not wise. Paul Schatz, president of Heritage Capital says "Positioning for this or any presidential election is a fool's errand." There’s roughly a 50% chance you will be right and, even if you are, policies may not change as expected. Campaigns have historically included many unfulfilled promises. Even when not intentional, campaign promises may be trumped by developing events (e.g. COVID outbreaks or international conflict). Aside from these concerns, policies require significant time to be enacted (over a year after inauguration, on average), and many require congressional approval (so other elections also play a large role).

Increasing / decreasing stock investments based on the election result (after the election)

Most investors believe stocks perform better when a republican is in the white house. However, we’ve found no basis for this claim. Certainly lower taxes increase corporate profits, but there are many other factors to consider like higher consumer spending under democrats. What does the data actually say? It’s a toss up! Studies based on more recent history show significantly higher returns under democrats. However, more thorough studies have not found statistically significant differences between investment returns under republicans vs. democrats. Even if such a difference were found, it would not imply causation - a more preliminary factor may cause both an election result and market trend.

What about the 2020 election specifically? Again, we don’t see a clear stock market advantage to either candidate. Many expect that lower regulation and taxes under Trump will result in greater returns. However, people always think this about republican candidates. As discussed above, it hasn't panned out. Certainly tax hikes under Biden, if actually enacted, would deal a short term blow to profits and presumably stocks. However, they may be associated with enhanced stimulus and consumer spending that increase profits. Lastly, depending on how COVID progresses, both republicans and democrats may be forced into very similar low tax, high stimulus policies.

The China issue and deglobalization are sometimes raised in this context, but such policies are actually bipartisan and may continue regardless of who controls the house, senate and presidency. Of course, tactics may differ, but don’t expect warm relations with China if either party takes control.

Of course, there will be winners and losers in specific industries. Two of the big ones are energy and healthcare. One would expect democrats to increase incentives for cleaner energy sources. Trump would likely bolster pharma, while Biden would bolster healthcare services. None of these things are certain, and depend on other branches of government outside the white house.

Timing the stock market around elections

Many people are expecting volatility leading up to this election. Studies of the S&P 500 from 1964 until today reveal the opposite - annualized volatility was 13.8% in the 100 days before and after presidential elections, compared to a 15.7% annualized volatility for the full time period.

Some studies claim stock returns are lower in election years. However, more comprehensive studies have not found a difference of statistical significance.

Any investment changes I should make based on the election?

Look out for changes to retirement savings plans or capital gains taxes. Instead of trying to predict these things, it may be best to react once changes are enacted. E.g. if capital gains taxes increase significantly and you make frequent trades you might want to cut back a bit. If retirement plan benefits are reduced you may wish to save more outside your plan, ....