Facts make you more money than convictions. This is always true regardless of whether there are impending elections. For many, elections are emotionally charged, tempting us to invest according to convictions/beliefs and not according to facts. The 2024 US election race between Kamala Harris and Donald Trump has been a fiery affair – and continues to be full of emotion and instinctive decisions, says Vince Truong, partner at GSB Wealth.
However, it is facts that will help guide investment decisions around the elections and historical data that will guide our understanding of market behaviour.
But it’s very important to note just how limited that data is. Since 1927, there have only been 24 presidential elections. In the world of statistical analysis, that is hardly sufficient to draw significant conclusions. Hence, we need to recognise the tenuous nature of that data. However, the historical data do guide us and are certainly more fact-based than simply our convictions.
The markets are non-partisan (in the short to medium term)
Given how different fiscal policy (around taxes and spending especially) is between Democrats and Republicans, it doesn’t seem unreasonable to draw conclusions about what markets will do under different regimes. I have known people who wanted to sell all their stocks and leave the US when Barack Obama became president. They were certain the sky was falling and everything would collapse.
Well, in terms of market performance, that did not happen. As presented by Fidelity Investments, Strategas Research partners have provided the annual S&P 500 performance from 1933 to 2022 (excluding 2001-2002 when a Senator changed parties).
Based on this, the market has averaged positive returns under every partisan combination. That shouldn’t be surprising because in general, markets spend more time going up than down so we shouldn’t make too much of the influence of politicians on market returns in the short to medium terms (1 to 4 years). If anything, markets do best when there’s a divided executive and legislative branches such that it’s difficult for one party to enact their preferred policies.
But in the near term, markets may be impacted by the results.
By near term I mean the weeks leading up to and following the elections. For instance, since the assassination attempt on Trump in July, US equities have continued to rally, but for the first time in a good long while, value stocks and equally weighted ETFs (where each stock receives the same allocation as opposed to the normal market cap weighted where the largest stocks by market cap receive the largest allocation), have been outperforming the S&P 500 (a market cap weighted index).
The graph below shows where the equally weighed ETF (RSP) have outperformed since the 13th of July through 13th of October.
In July, markets began pricing in a Trump victory with expectations of higher tariffs which in principle would benefit smaller, more domestically oriented companies rather than the larger.
Note the spike on the Invesco S&P500 Equal Weight ETF, RSP around the 13th of July. The outperformance since then against the market cap weighted iShares S&P 500 Core is significant because the Equal Weight ETF has been underperforming for years.
The reasons for this can be many and not some not always apparent. The US economic picture has held steady in the face of potentially rising unemployment and a rebound in inflation, and the Fed has begun to cut rates. Greater clarity on a strong domestic economy benefits RSP.
However, the timing does not appear to be happenstance.
If Trump wins the election and even more so if Republicans take control of congress, markets are expecting tariffs, rising inflation, a weakening of the dollar and a rise in bond yields. Even if these occurrences do not happen, in the very near term, markets will likely behave as if they will happen, until proven otherwise.
This leads us to perhaps the most important guideline for investors around elections.
Know your time horizon and invest/trade accordingly
For long-term investors like advice and wealth clients, speculating on short term gyrations around the elections is likely not a trade that adds value.
It would be better to ignore the noise and focus on things which matter outside the time frame of a few weeks – fiscal policy that actually gets enacted, inflation, central bank policy, unemployment, earnings, private spending in fixed investments, durable goods and business equipment.
All of these are more meaningful in the medium to long term, but none of them will be evident before the 5th of November nor in the weeks following the election.
It’s best to sit tight through the elections, make no changes, wait and watch.
By Vince Truong, Partner at GSB Wealth
