What investors should do before the US election

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October 30 2020
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As the election date draws near, investors are being urged to forget the “fireworks and noise” and focus on the long-term fundamentals when investing in the US.

What investors should do before the US election

As a decisive Biden victory is looking increasingly likely, Principal Global Investors chief strategist Seema Shah told investors that regardless of who wins, it will have little bearing on the long-term trajectory of the market.

“We know from experience that polls do not have a perfect predictive track record, but neither do market expectations. The overwhelming belief in 2016 was that a Trump victory would be negative for risk assets, yet until the pandemic Trump had presided over one of the best market performances in decades,” he said.

Mr Shah said investors should remember that the “fireworks and noise” surrounding the election will subside and markets will reassert a trajectory determined by fundamentals rather than election news flow.

“In our view, reducing long-term investment allocations because of a political view means taking a stance against the ability of the US economy to grow, and believe that an active, long-term approach remains best, even for investors worried about the election,” he explained.

The stock market indicator v election betting odds

Sean Markowicz, global strategist at Schroders, told investors to watch the stock market when trying to predict the winner.

The stock market has a strong track record of correctly “predicting” the outcome of presidential elections. Whenever US equities were up in the three months leading up to election day, the incumbent party won and whenever they were down, the incumbent party lost.

“Since 1932, this methodology has correctly predicted the winner 86 per cent of the time, or 19 of the last 22 presidential elections. So with the S&P 500 index up around 4 per cent since August, markets seem to be pricing in a Trump victory,” Mr Markowicz said.

However, the investor pointed out that the markets are up while Mr Trump’s odds and polling data have fallen.

“One possible explanation is that Biden’s widening lead in the polls has reduced the possibility of a contested election, which is perceived as more negative for stocks (at least in the short run) than fears of higher taxes or regulation under a Biden presidency,” Mr Markowicz said.

“At the same time, stock prices do not just give a possible indication of who might win the presidency, but also the state of the economy, which has been recovering from the fallout of COVID-19.”

“Another possibility is that the betting markets have placed too much confidence in a decisive win against Trump.”

What should Australian investors do?

A recent discussion on the likely local impact of the US election between three leading investment experts from ETF Securities (Kanish Chugh, head of distribution), Pitcher Partners (David Lane, director and senior adviser) and Evans and Partners (Timothy Rocks, CIO) concluded with a consensus advice for Australian investors to maintain their long-term strategy, have an allocation for defensive assets such as cash and gold, and look for buying opportunities in drawdowns bought on by any post-election-induced volatility.

The three industry experts also believe Biden will be elected president, which may have a short-term downward effect on the market, albeit the COVID situation likely to have a larger impact on the general market direction.

They also pointed out an increased stimulus spending resulting from a Democrat in the White House and a ‘blue wave’ delivering both Houses to the Biden forces countering the impacts of likely higher corporate taxes under a Biden administration was flagged as a possibility.

“When you historically look at markets reacting to US elections, in most periods you actually find that the volatility of markets increases for the three months prior to the election. That hasn’t actually been the case this year. We had so much volatility earlier in the year that last few months have been relatively modest in terms of volatility,” noted David Lane director and senior adviser for Pitcher Partners.

“Now is the time to be defensive in our portfolios. We feel uncertain about the three to five-year story for markets than we’ve ever been. Now is the time for investors to maintain healthy levels of defensive assets, including cash and gold,” says Mr Rocks.

While Mr Shah pointed out that markets have already priced in the chances of a Biden win. He said positioning a portfolio based on which candidate is likely to win could be a dangerous strategy.

“Regardless of the outcome of the election, markets will remain buoyed by easy financial conditions, accommodative monetary policy and ample liquidity, factors which have already driven them to record highs despite the disastrous effects of the pandemic,” Mr Shah said.

“Ultimately, investors should remain focused on fundamentals and fully invested during the election. The priority should be diversification and active positioning for a slow and protracted economic recovery backed by central bank liquidity.”

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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