At the time I wrote this article, the economy was performing both exceptionally and terribly at the same time. The technology industry is going through a massive evolution as worldwide implementation of increased stay at home measures means more computers, cyber security, web based, cloud based, and technological solutions are needed to do business safely. At the same time, travel, oil-based commodity companies and hospitality industries suffer greater. The weekly average of fuel supplied to retail gas stations rebounded from March COVID lows, but according to Market Watch at the end of September those averages are still down 4.5% from pre-crisis weekly average. Worse yet, the TSA average of 2.1 million passengers per day is down 62% since the first quarter of 2020 (also according to the same Market Watch Report – see charts below).
As if the disparate views of the economic have’s and have nots isn’t enough, we are facing a monumental election on top of working our way through a global pandemic. The purpose of this article is not to espouse our political views. Rather, we do what we always do. We scour the world for data. We look at history. We seek to make inferences and decisions based on data and work to provide economic sense through a deluge of information. With 25 years of experience, even doing this around the clock, I am continually reminded of just how difficult this job can be.
The first data point is what if we do not get a winner in November? This kind of election chaos has been seen before. The most recent case with no immediate winner after the U.S. election was the stock market of 2000. The Bush vs. Gore election results dragged on for weeks, and we all hung on the hanging chads of the Florida ballot box. It was a brutal time to follow politics, but do you remember the market also traded down 11.8% from the day after the election to December 20 when a winner was decided? That downside seems reasonable to expect during this election cycle if we do not get an immediate declared winner or some form of contested election. It’s good to know what we may be facing the day after the election especially if the results are not immediately known.
Our clients know we spend endless amounts of time forecasting and going through historical scenarios to help figure out how best to navigate client investments. Within our portfolio management software, we run scenarios based on potential election chaos. There could be a myriad of outcomes in the election. Boiled down, the results could be other good, average, or bad. For purposes of illustration, it is good to know and see what these three base cases may mean to our bottom-line portfolio results. The chart below provides a nice graphical illustration of potential outcomes to consider:
Source: Hidden Levers
If I were to ask you a question, I wonder how each of you would answer. Let’s see:
If you look at the annualized returns for each presidential term dating back to 1937 to the end of 2019, which political party boasted a higher annual return? The answer – it’s about even! Democrats average 9.2% and Republicans average 9.1%. (Source: Bloomberg and AB).
If you seek a way to handicap whether the market should perform better or worse after an election, a better gauge is comparing a divided government versus a unified government. Those results show that there is a clear edge in favor of a divided government with an average annual return of 10.0% compared to a unified government annual return of 8.2%. (Source: Bloomberg and AB)
The market will create different expectations and will likely move depending on the eventual outcome of the November elections. Remember the stock market doesn’t wait for the earnings results to move stock prices. The market reacts immediately to the news and then down the road the actual results may move the market better or worse depending on meeting or exceeding those expectations. In our work, we came across a great matrix that may be a nice cheat sheet to show you where to consider putting capital given a particular election outcome. Of course, please consult your advisor before making any of these decisions in your own investment portfolios:
Source: Alliance Bernstein
Despite the data and fact, keep in mind, investing is a long-term process. Despite the rancor, consternation, and television coverage, we invest to participate in the growth of great companies. Over time, we hope terrific companies get bigger, make more money and become more valuable so their stock prices can rise. Like the chart below indicates, the market does not care if the results are blue or red. Yes, there are some factors that can help expedite growth or emphasize one sector over another but the big picture continues to remain clear that trying to second guess the results and zig zagging in and out of the market can be detrimental to your portfolios investment health.
Be sure to hear more about the election and potential economic impact in our quarterly Capital Market Outlook which is launching mid-October. As always, reach out with any questions or feedback!
Source: Forbes and Hidden Levers
Michael Carlin, AIF®