Election Market Update: How Investors Are Reacting To The Polls
Dear Rich Lifer,
It seems like just yesterday that the unexpected results from the 2016 elections started coming in. Hilary Clinton’s supposed easy victory was slipping away, and Trump’s apparent win sent DOW futures and overseas investments careening.
How the markets will respond to Tuesday’s election is still very much up in the air.
But regardless, investors are heading into a uniquely volatile week.
Money managers and strategists are reluctant to make projections after being caught off guard by several market-jolting shocks over the past four years.
Remember, it wasn’t just the election that affected things; other factors such as Brexit and coronavirus also did a number on the markets.
And although national polls are currently showing Joe Biden leading Trump, no one is willing to make bold investments after the burns received in 2016.
Right now it seems like the only consensus is that the 2020 election will have lasting ramifications for investors for years to come…
We can not dispute the fact that stocks have risen historically, but we have also seen a volatile few weeks for the market. The S&P 500 has fallen 5.6% in the last week (its worst month since March), trimming its gains for the year to 1.2%.
According to Investment Banking Company UBS, roughly 63% of investors have tweaked their holdings in some way ahead of the elections.
Many of these moves have been strategically defensive.
Roughly 6 in 10 investors with at least $1 million in investable assets already have made changes to their portfolios ahead of the elections.
Approximately 36% have increased the share of cash they have on hand, 30% have adjusted sector allocations, and 27% have added protections.
It doesn’t help that Biden and Trump have laid out vastly different plans for the next four years, leaving investors with zero clarity as to what industries will be good bets for the future.
This has resulted in more than half of investors declaring that even more changes to portfolios will be made when the winner of the election is announced (whenever that ends up being).
Changes to portfolios are already making waves. We are seeing long-term bond yields and shares of smaller U.S. companies climbing because of the Democratic lead in polls.
Additionally, investors seem to think that a blue wave would increase the chances of Washington pushing through a multi trillion-dollar coronavirus-aid package to bolster the economy.
You Can’t Predict the Future
Richard Bernstein, chief executive and chief investment officer of Richard Bernstein Advisors, stated that what really matters is, “not who wins the White House. It’s who wins the Senate.”
However, even those who buy into the conventional views of what a divided Congress (or blue wave) might look like, caution that polls and policy proposals aren’t the “be-all-end-all” for making market bets.
For example, let’s look back at the 2016 election when pundits predicted a Trump win would shave upward of 10% to 15% off the S&P 500. At first, they were correct! But by the close of the next trading day, stocks were higher.
Strategists had also anticipated that a Trump presidency would lead to deregulation across industries, boosting the energy and financial sectors.
Again, they were correct at first!
But since Trump’s inauguration, energy and financial stocks have fallen to one of the worst-performing groups in the S&P 500 due to factors such as a collapse in oil prices and historically low-interest rates.
If investors have learned anything, it’s that winning market bets are hard to predict – but even tougher to time correctly.
Bruce Monrad, chairman and portfolio manager at Northeast Investors Trust, put it well when he stated, “Figuring out the news isn’t necessarily good enough, because the paradigm might change. One day after the election we may go back and be revisiting all our rules of thumb.”
And another strong possibility as the election draws closer – what if the election results are contested? Investors are fearful that unclear election outcomes could have disastrous effects on the markets.
52% of investors predict a market decline if the election is contested, while 19% predict a market upswing and 29% predict no change to the market.
Advice From Money Managers
Dave Donabedian, chief investment officer of CIBC Private Wealth Management, has been offering this advice to his clients: Don’t be tempted to overhaul portfolios now based on what might happen on November 3.
In 2016 we saw investors lose big on election day — like George Soros, who lost nearly $1 billion betting the market would fall after Trump’s win.
Stay alert and cautious, but as we have all learned – betting on an election can often have surprising results.
In fact, most long-term investors see trying to game election night itself as a losing proposition. Donabedian stresses that the markets will adjust to the outcome of the election, regardless of what happens.
There could be a blue wave leading to massive stimulus. We could continue to see Congress divided. Or, we could see unprecedented results.
Truly, only time will tell.
We will anxiously await the results of Tuesday’s election. Whether a winner is declared that very night or sometime in the week to come, it will certainly be a historic election.
To a richer life,
The Rich Life Roadmap Team