Most voters say “yes” but historical research says “no”. It is common for voters to have strong beliefs supporting why their political candidate is more beneficial for Wall Street, but research would argue that is not the case. Stocks have historically performed well regardless of which party controls the White House (we will revisit this topic later in the article). Presidential elections can create a change in the overall direction and focus governmental policy has on the business climate in the country. Depending on the outcome of the election, some sectors will be negatively impacted, while others will thrive.
Let’s examine what the different presidential election outcomes might look like.
President Trump re-elected:
If President Trump is re-elected, we already understand where his administration’s policy direction will be headed – essentially maintaining what we have seen over the past four years. This means an environment of reduced governmental regulation, lower taxes, domestic focus, tariffs on imports, etc., are likely to remain in their current state. This could lead to positive impacts for all 11 sectors of the S&P 500.
Biden is elected:
Should former Vice-President Biden win the election, his policies are likely to be significantly different from what is currently in place. Based on his proposed platform we could see a repeal of the 2017 tax cuts which lowered corporate rates to 21% from 35%. The current proposal from the Biden campaign is to increase corporate taxes to 28%. Increased corporate taxes mean lower corporate profits and lower stock prices assuming all other factors remain the same.
Biden’s platform is also calling for an expansion of Obamacare, a move that would most likely be positive for certain segments of the healthcare sector. It should be noted that some areas of healthcare will likely be negatively impacted due to his position that he would negotiate lower Medicare drug prices.
International investments under a Biden presidency are predicted to perform better than they have under President Trump due to the expectation that Biden will drastically lower or eliminate tariffs on imports. The offset of this policy change will likely lead to lower US manufacturing productivity and higher unemployment in this sector domestically. With this also comes the potential for a declining US dollar, an effect that generally is positive for foreign stocks held by US investors.
Markets go up regardless of elections:
The sensationalism of this upcoming election is something we have never experienced before. Political gridlock, fear mongering and outrageous accusations make headlines on a nightly basis. If we look past all the alarming news stories and look at how the aftermath of elections have played out historically, we will have a better understanding on what to expect in the coming months.
Election years can cause investors to become overly focused on the election directly in front of them and lose track of the long-term focus they should be maintaining. Over the past 85 years, markets have trended higher regardless of which party wins the election. In the graph, you can clearly see the S&P 500 has moved higher in almost every situation despite whether a Republican or Democrat controls the White House. The only exception to this was Bush 43 which experienced 9/11 at the beginning of his term and the 2008 financial crisis at the end.
As you can see, there are scenarios under each presidential election outcome where market gains are apparent. Considering pulling a portion of your investments out of the market ahead of the election could be understandable for investors who have a short time horizon or are more conservative in nature, but this strategy has historically come at the cost of missing out on noticeable gains.
Understanding how to allocate your funds into the respective sectors to make the best of whichever situation prevails can be tricky for the average investor. Having professional guidance during complicated markets can dramatically help take away the guessing game.
Long-term investors should avoid the temptation of short-term thinking in these situations and stick to their primary goals, understanding that volatility will likely be apparent for the short-term. Staying invested is the best approach. While not easy at times, it has yielded the best outcome under almost every historical situation. Ultimately, for long-term investors remaining invested with a well-diversified portfolio has mathematically yielded the greatest outcome regardless of which party controls the White House.
For current clients, your existing portfolio reflects our current philosophy and should we see a change in the balance of power, you can rest assured we have proactively prepared portfolio changes that are ready to be implemented if necessary. To learn more or discuss our strategy further based on your specific situation, please do not hesitate to call or email us.
If you are not a current client and would like to have the same level of care and foresight that our clients receive, we would welcome a discussion with you to see if our philosophy and management style is a good fit for you. Consultations are at no charge and without obligation to use our services, contact us now. We look forward to hearing from you.
Capstone Wealth Advisors
Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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