The upcoming election and your portfolio: anything to do now?Submitted by S. F. Ehrlich Associates, Inc. on October 6th, 2020
September 30, 2020
As many long-time investors know, the stock market doesn’t react well to uncertainty. What the market does reward is constancy: interest rates that don’t fluctuate to any great degree; an economy growing on a gradual incline; and a lack of drama. When it comes to 2020, put a check next to constancy in interest rates, as there’s no sign they’ll go higher, potentially for the next few years. And then put your pens down; the quiz is over.
As for the economy, the answer as to whether or not it’s growing is industry-specific. The economy is booming for some (think large tech, such as Amazon, or mega–retail with an online presence, such as Walmart) or is in a down cycle for others (think airlines, the cruise industry, and restaurants). By combining all the parts together, we have an economy that has bounced well off its lows but is still far from pre-COVID highs.
Consequently, in terms of the stock market, U.S. large-cap growth stocks have had a good year, while many other equity classes are still down. At some point, this means U.S. large-cap growth will extend their valuations too far, making all other asset classes (potentially making value, small, foreign) relatively more attractive to buy.
And then there’s the drama because the upcoming election has the potential to uproot an otherwise routine chain of events (e.g., vote, count ballots, declare a winner). In terms of uncertainty, we’ve been down this path before, such as the Gore-Bush election. Rather than declaring a winner on Election Day (November 7, 2000), a winner wasn’t determined until December 11, 2000. From Election Day until the day Al Gore conceded the election, the S&P 500 fell 8.9%1. But that was then, and this is now.
Is there a way to ‘play’ this election?
Sure, so long as losing money won’t upset you. If you’re a knowledgeable options trader, for example, you can place bets on market volatility. (The word bets is used liberally because options are like betting. In fact, there are times you can lose more than you bet, which must be especially exciting for novice options traders to learn.)
Long-term investors aren’t bettors, and hoping you’re right isn’t exactly an investment strategy. The 8.9% market drop in 2000 is no longer even a distant memory, so a comparable, or even larger drop that might occur this year, will also be long forgotten in a few years.
The potential reward for doing ‘something’ before the election is not worth the risk. (Remember those previous comments about what you want and what you need?) We don’t have separate Biden or Trump portfolios; portfolios will not be reconstructed based upon who wins the election. The U.S. economy has performed well (and poorly) under both Democrat and Republican presidents2, so it makes little point to start predicting how well, or how poorly, things might turn out if one or the other wins.
There’s enough anxiety going on in our still abnormal lives. Worrying whether or not your bet on the market going up or down based upon election results isn’t worth the additional stress.