2020 was always set to be pretty volatile in the run-up to November as what has been predicted to be a particularly polarizing election looms closer. COVID-19 may have taken some of the focus away from the fact that this is an election year, but the two worlds collided when President Donald Trump and a plethora of White House aides recently contracted COVID-19 during his campaign trail.
Whilst market volatility is something that we are perhaps getting used to as we manage the effects of the coronavirus, the question most investors should be asking themselves is:
Will this election affect the stock market and thus your portfolio?
Historical market movement surrounding elections
According to a recent survey, around 93% of investors hold the belief that the stock market will be affected by the presidential race. Furthermore, 84% then suggested that it would change their investment habits. Indeed, heightened emotions can cause unpredictability when it comes to investment decisions. However, whilst history has taught us that, in the short-term, politics can cause some turbulence, election day does not impact long-term investments and the market will continue to grow.
Take 2016 for example. For many, Donald Trump’s election win was a surprise, and whilst the S&P 500 (NYSEARCA: VOO) initially fell around 5% in pre-market trading, it was up 1% by the end of the day. Yes, the market hates uncertainty, but it can quickly and easily absorb new information meaning that short-term volatility will eventually peter out.
So what about this year?
To say 2020 has been different would be an understatement! The election has crept up on us rather quickly and it has been tied up with coronavirus news which I am sure we are all a bit tired of reading about by now. However, as mentioned above, the market does not like uncertainty, and this year the uncertainty is heightened.
When looking at the potential results, 3 scenarios stand out:
- A Trump win with a continued split congress
- A Biden win with a split congress;
- A Biden win with a Democrat congress.
Of these, the last is most likely to result in a market dip due to Biden’s tax plans which would ultimately pass. If this is the result, then FAANG stocks are the most likely to suffer whilst healthcare, clean energy, and other infrastructure stocks will see valuations rise. If the third scenario does indeed play out, then it might be advisable to see any resulting dip as a buying opportunity.
Of the 3 listed above, the scenario the market will probably prefer is number 1. Continuing with the political status quo is generally good for stock investments, providing a little more stability. Additionally, a split congress tends to deliver an average annual return of around 17%.
Ignore, hold, and diversify
A simple Google search of the last three elections and ‘stock market’ shows that each time the market has fallen, it has recovered pretty soon after. Whilst in the short-term this might cause panic, in the end it shows that all will eventually return to normal. As an investor, it would be best to ignore the dire warnings of what will happen if ‘so-and-so’ wins. Using lessons from the past as well as our understanding of the stock market, investors should focus on holding investments and resist the urge to sell off in a fit of political passion induced by attention-grabbing headlines.
Whilst taking stock market predictions with a pinch of salt during the election run-up, it is also a good idea to expand your portfolio. Essentially, look at different industries in which to diversify thus increasing your ability to manage market volatility. For example, having some stake in one of the FAANG companies as well as a health-care company would help with any scenario 3 disturbance.
Ignore, hold, and diversify is a surefire way to help any investor manage a turbulent stock market, even one during an election year amid a pandemic.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.
Contributing Writer at MyWallSt
Poppy likes companies that go the extra mile. Her favorite stock is Amazon because she is fond of its innovation, variety, and creative solutions to sustainability.