What the Election Means for Your Portfolio

In case you have not heard, we have an important election coming up. According to politicians it is the most consequential election in American history. That is a pretty bold claim when considering past election surrounding events like the Civil War, WWI, WWII and many other seminal moments in American history. Of course, this is the election happening now, so in this moment it is the most important election.

Regardless of political affiliation, we must focus on how the election outcome impacts your portfolio. We have heard from several clients expressing concern about one election outcome over another. Most of the time, it is an expression of fear, that if the election turns out a certain way, the stock market or economy is doomed to collapse. This is not unique to this election by the way. We heard the same concerns 4 years ago and 8 years prior.

Today, there is quite a bit of worry over a “blue wave”, meaning a Biden presidency as well as the Democrats taking the Senate. The fear is the Democrats will raise taxes on the wealthy and on businesses, and increase regulations, which will inevitably lead to a collapsing stock market.

We will opine on what certain election outcomes might mean for the markets later in this article, but first let us look historically to see what a “blue wave”, “red wave”, or gridlocked government has meant for the markets.

Oddly enough, since 1926 a unified Republican or Democrat government have had almost the exact same returns (difference of 0.001%). When we have gridlock, it is actually paid to have a Democrat as president. Note the Republican gridlock data is skewed by the performance of Herbert Hoover (3/29 – 2/33) as he presided over the start of the Great Depression and ended up with an annual average return of -27.19%, the worst of any president.

So, what does this table tell us? We would argue not much. There just are not enough observations to draw any conclusions from the chart.

That being said, we can already hear the reader saying, “ok but this time it’s different”, and of course it is. So, let us speculate a bit on what a couple of election outcomes might mean for the market.

Blue Wave
This seems to be the outcome most market commentators believe is most negative for the stock market. The simple idea is a blue wave will result in higher taxes on individuals and businesses and increased regulation. This is certainly in the rhetoric from Biden’s campaign.

These on their own would be a negative for the market. Indeed, corporations got a huge boost in profitability when they saw their tax bill cut in half from Trump’s tax bill in 2017. Reversing the tax decreases should have the opposite effect, in isolation.

Of course, it is also the Democrats that have been trying to push larger and larger fiscal stimulus packages. Setting aside the longer-term implications of budget deficits or inflation, fiscal spending has historically been an enormous tailwind for stocks. Take 2020 as a simple example, GDP is down the most since the Great Depression, but the market is ahead for the year. Fiscal stimulus helped plug the gap.

In addition, any tax increases might be delayed with the economy in such a fragile state. Regardless of who wins the election, expect more accommodative policy in the near term.

Grid Lock
This scenario could be the most interesting. Some view grid lock as a positive. The idea is that with the government largely doing nothing due to lack of agreement, the free market can do its thing uninhibited by government interference.

On the other hand, this can be dangerous today with the economy in such a fragile state. Any stimulus may be better than none, so a delay from a divided government could prove damaging.

These are really just simple narratives that help us make a quick forecast. Of course, the reality will be much different. What is said during a campaign is often very different from what is done once in office. Not only that, but there are unforeseen events that will force each candidate to adapt their plans on the fly. Did anyone discuss a pandemic in the last election?

Two other points are important when considering elections and their consequences. First, markets anticipate the outcome. Markets reflect the collective wisdom of millions of individuals making economic decisions which tend to be more rational than political decisions. Markets, therefore, anticipate most outcomes which means the outcome is mostly reflected in prices. Trying to trade in anticipation of something that is already in the market is a loser’s game. And doing it in too many instances could permanently hinder your ability to meet your long-term goals.

Second, we have federal elections every two years. Obama won his first term in a blue wave. Trump won his term in a red wave. What happened two years later to both Presidents? Both lost the House of Representatives which checked their power. In fact, this outcome is typical in many past election cycles. If a party with Presidency and Congress overreaches, voters usually vote for change in the next election. This makes it difficult for any party to fully implement their agenda and makes changes in policy occur slowly over time.

We are not saying that it does not matter who wins the election, or that it is not important. It is very important. There are social issues involved, your personal tax situation or your industry may be affected, there are geopolitical issues at stake. As always, our solution to all this uncertainty is to find as many unique sources of return as we can and diversify amongst them, so that your portfolio is not one of the issues you need to worry about.