Trying to predict the markets over the short run is tricky business, but keep in mind, the market is a forward-looking mechanism. Over the long term, it gets a little easier. The markets go up about 4 or 5 times as often as they go down, but how presidential elections affect the stock market is its own science.
The media proved how difficult it is to predict elections in 2016. Forecasting how an election may impact the markets…during a pandemic…and on the heels of a recession. Quite an undertaking, but here goes…
We will start by saying that the President often gets too much credit and too much blame for the stock market. The market does not really care about what one person does but does largely care about earnings. In the U.S., earnings are about consumers as we make up 2/3rds of the economy. Consumers spend if they are employed. In an indirect way, what the President does to put people to work does drive the economy and the markets, but these policies take time to play out. Also, the President does not always have control of unforeseen events, like a pandemic.
The “Presidential Election Cycle Theory” initially theorized by Yale Hirsch states that we can time the markets based on where we are in a President’s term. This data suggested that investors should invest in the stock market on Oct 1 of the second year of a Presidents term and sell on Dec 31 of their fourth year. While the study provided a trend, it has not always been true and forgets an important part of our investment philosophy, diversification. While the data tells a story, the returns are positive in all years and the difference is negligible in the best year compared to the worst year.
That provides some historical context, but how will this election impact the markets?
The consensus seems to be that there is no consensus. Some economists believe that the market favors Trump’s low taxes and light regulation, while others on Wall Street believe Biden brings more stability calming the markets. Perhaps the biggest threat to the market is the unknown, but most expect a disputed election due to the pandemic and the pre-election focus on election rigging. Many believe that markets have priced this in, and it should mute the impact of a disputed election when compared to the 2000 dispute over “hanging chads” in Florida. During that six-week standoff, the market retreated 12%.
The biggest fear we have heard is what if a Biden presidency is paired with an increase to both the corporate tax rate and capital gains tax rate. Now, getting things done in politics is never easy, but when they are…the impact these policies have on markets lags significantly.
We are in a pandemic and that could sway things one way or another, but the headwind of the pandemic is contrasted by the tailwind of cheap money. With cheap money from the federal government in the form of low interest rates, our economy is poised to recover. Strothman Wealth Care carefully builds allocations around your goals and objectives. If your financial situation has not changed, perhaps your portfolio does not need to change either. Contact Ryan today to consider all of your options.
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