The remaining weeks leading up to the U.S. Presidential election will be full of uncertainty. Many Americans are anxious about the outcome, especially now that the incumbent has been hospitalized by COVID-19. We know from 2016 that polls occasionally miss the mark and we have already seen two candidates this century defeated while winning the popular vote. A new twist for this election will be the uncertainty around counting mail-in ballots. There is the likelihood we will not know who the winner is for days (maybe even weeks) after November 3rd, especially in the event a candidate disputes the result in court. As if that wasn’t enough, there are also questions about the empty Supreme Court Justice seat being filled before the election or during a potential lame duck session, and which party will control Congress coming out of the election. It’s no wonder many are asking what to do with their investments through all this uncertainty, and some might even be considering “sitting on the sidelines” in cash until it’s all settled.
It is tempting to simplify the events that will drive the stock market over the remainder of the year and think it mainly comes down to the election. But in reality, many factors contribute to move the market: the election, but also the coronavirus, civil unrest, oil prices, interest rates, natural disasters, actions of other countries, etc. Literally, there are as many factors that move markets as there are investors with varying goals, values, and tolerances for risk. In reality, it is hard to predict how the election will affect the markets. Figure 1 shows the history of U.S. Presidents during my lifetime in relation to stock market performance, and as you can see, there is no clear pattern between the two.
As we have often done in this newsletter when faced with uncertainty, we reiterate our time-tested principles. Chiefly, a short-term phenomenon like the election (or the virus, or civil unrest) should not provoke us into temporarily liquidating our longest-term investments (or delaying a new investor from purchasing those investments). And this time is NO different. Even if a market decline occurs around the election, which would require something to happen that’s materially different from ‘the market’s’ expectations, it will only be temporary. (Keep in mind other market participants are just as aware as you or I are of the risks of a contested election, the President having COVID-19-related complications, the Supreme Court seat, and COVID-19 more broadly.) The correct policy is to ride it out, as we have every other “apocalypse du jour.”
It isn’t one or the other of the presidential candidates the market hates and fears; its uncertainty. The resolution of the election either way (even if delayed) will likely give the market the clarity it craves. It’s possible one could exit the market and subsequently re-enter before it rises in relief, but that would be nothing more than a coin-toss bet with no plan behind it, especially because that rise will occur over an unforecastable timeframe. By contrast, Figure 2 helps provide a basis for a plan that addresses the election.
We see the market has grown tremendously over the past 16 Presidential terms, with $1 growing to $10,000 when invested in a “bi-partisan” manner. In a similar study, it was found that the same $1 invested in “partisan” portfolios (which were only invested during either Republican or Democratic presidencies) did not break $200.
The temperature in politics is higher than most of us can remember. Yet in 1804, founding father Alexander Hamilton and sitting vice president Aaron Burr settled their political disagreements with a deadly pistol duel. The challenge for any investor right now is to put aside personal political views and anxiety in order to recognize the long-term growth of capitalism over time. That is what we want to capture, regardless of whether it is a Democrat or a Republican in the White House. This is why we strongly recommend to stand fast and continue on our course, which has worked so well for so long.
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