Election-Year Volatility Got You Nervous? Here are 3 Things to Consider Before Making a Change to Your Investments [Part 1 of 3]

In January, few of us would have predicted that the presidential election would be the second-leading story of the year. Now just two months from the election and with the two combatants decided, many Americans are ramping up for a dramatic finish to the end of 2020.

As some kids are heading back to school and families are getting back into a routine, focus for our wealth management clients have shifted from “let’s meet early next year when I have my life in order,” to “the election has me pretty worried, what should I be doing with my retirement plan?”

While we certainly appreciate the opportunity to have discussions with clients, I’ve felt a little bit like a broken record lately – there’s only so many times I can tell people to hold a steady hand to the market before I start muttering it in my sleep. Just ask my wife.

There are plenty of tropes I could regurgitate every four years without fail; it’s like the hourglass has run out of sand and I flip it over to start the cycle once more.

“Keep your hand toward the flame: occasionally you might get licked by fire but most of the time it will keep you warm.”

“Your retirement account is just that… for retirement, not now!”

“Just because your neighbor has an ache in his knee doesn’t mean the stock market will fall. It’s more likely it will rain today.”

And just like a comedian working on a new routine, it takes me a few practice runs before getting the message down once more, but after a dozen or so I feel my ability to help dissuade clients from making regrettable decisions begin to improve.

Admittedly, everyone’s situation is different, and sometimes holding pat on your investments isn’t the best strategy. Many people are now risk-averse with their investments because of what happened in the first quarter of this year. Others have more aggressive portfolios, attempting to take advantage of recent stock market success. There is no one-size-fits-all solution when it comes to your money, and you should account for your personal goals before making any changes.

But if you’re like me, you’re feeling anxious about the election, and our eyes have collectively turned to our investments to gauge how the markets are interpreting our prospects.

I hope to provide a pathway to discover whether your fear is warranted and requires introspection, or permits an opportunity to take a step back, breathe, and remind yourself of some tried and true methods of investing.

Before I jump into part one of a series of posts regarding the stock market and elections, I’d like us all to remember one thing: people pay more attention to the stock market in an election year. Sensitivity to short-term market performance is much more pronounced in an election year and often leads to knee-jerk reactions. In fact, it could be so pronounced that recent market performance may swing some voters to either vote for the party in power when things are going well or choose the challenger when the market is shaky.

With this reminder in your back pocket, let’s begin by examining why that logic is detrimental to most investors and what we can do to calm the voices in our heads when our future is uncertain.

Markets are a long-term barometer

Picture this: you turn on the TV to your favorite business news channel and you notice the hosts and reporters reacting positively to an earnings report of a major company. They talk about the genius CEO, the innovative marketing firm that is helping them with sales and the firm hand of the CFO that has led to their success.

You think, “wow, this company must be ready to explode, I should get in while the iron is hot!” You load up your brokerage account on your laptop, search for the stock, then notice some interesting: somehow, the stock is down for the day!

What gives? If this company is doing as well as the pundits say it is, why isn’t that firm’s share price going up? How can the value of the company not be increasing after such positive news?

It’s simple really: institutional investors are already looking forward to the next earnings report three months down the road while you’re stuck on last quarter. The company should be lauded for reaching their sales goals and earning their shareholders increased value, but investors are looking at new goals, new challenges and an uncertain marketplace and saying, “congratulations, but perhaps your success won’t be quite the same in a few months.”

When we broaden from one company’s stock to the performance of the stock market, we can understand that the market is better understood as a long-term barometer of performance than it is a day-to-day indicator of success. When a company is being valued every trading day, investors are not just looking at where it sits currently but where it’s going in the future.

Case Study: Tesla

Tesla is a great example of long-term focus against short-term speculation. Tesla’s stock price has risen over 400% in 2020, much of it based on the future profitability of their products. The company known for innovative products and ideas has recently become profitable, a huge turning point for investors.

However, the S&P 500 index – a barometer of performance based on the 500 largest, publicly traded companies in the United States – did not include Tesla’s stock on their recent quarterly update. The snub saw Tesla’s share price shrink in recent days, halting the unprecedented gains and bringing Elon Musk’s firm back to earth (see above image).

Much of the recent collapse of Tesla’s stock price is due to short-term uncertainty. Markets love certainty and the security it brings. It’s the weighted blanked of comfort that allows markets to experience low volatility. When companies meet expectations, the market will generally reward them with the stock price they believe they deserve. But when a firm greatly misses its target, investors will react accordingly and lower the company’s value.

In the case of Tesla, speculators were assuming that Tesla would be included on the next edition of the S&P 500 and enjoy the accolades that come with it. Being excluded stunned investors and the market adjusted accordingly.

But even with the recent hit, Tesla is still being pursued by investors and enjoying a great 2020. Short-term speculators are still holding out hope that the next S&P 500 update will include Tesla, but long-term investors believe the firm’s outlook is good beyond the next three months.

It’s sometimes difficult to see the forest for the trees, but those investors that are bullish on Tesla will continue to hold it for its long-term appreciation even when it hits a speedbump.

Case Study: 2016 Election

Bringing the focus back to elections, another example of short-term speculation was at the end of the 2016 presidential campaign. Just when she thought it was behind her, Hillary Clinton was greeted with news in late-October 2016 that then FBI Director James Comey would reinvestigate emails found on her servers. The polls reacted to the news, tightening the gap between Clinton and Donald Trump just days away from the election.

Speculators believed that Clinton would win the election, and the stock market reflected that assumed reality. When news hit that might throw their predictions into jeopardy, the polls showed new uncertainty (Figure 2), and looking at the S&P 500, we notice volatility in the days after the news (Figure 3). Interestingly, as soon as Director Comey announced that the investigation was closed, markets saw an uptick.

On November 8th, the election results of the 2016 presidential election shook the global markets. Between market close on election day and market open the following day, Dow futures dropped almost 800 points and the S&P 500 dropped about 5%, although those numbers were much more muted by the time the stock market reopened. Trading volume increased the morning following the election in reaction to the results and to “correct” the positions speculators took before they knew who our next president would be. Armed with new information, investors made decisions to align with their new outlook. 

Market makers look at what is happening currently and “bake in” some logical results that are likely true.

The short-term speculation that the email investigation would be detrimental to Clinton’s campaign made polling number change sharply in favor of President Trump along with a temporary dip in the stock market as investors adjusted expectations. When the investigation closed, polling numbers reversed, and the market rebounded. When the election was over, investors had to readjust their expectations given a different outcome than what was assumed.

Heading into this year’s general election, the lessons we learned in 2016 can be applied to make more informed choices regarding our investments. Market makers look at what is happening now and into the future while “baking in” some logical outcomes that are likely to be true. Taking what they are given, they then make educated decisions on what to purchase and what not to purchase.

If an investor were to bail on their investments at the end of October, they would be worse off than just letting things ride through the election cycle. Focusing on the news of the day would have prevented them from enjoying a rebound days before the election and the growth of the stock market over the next several years.

So, what should we take from all this?

Looking at what’s happening in September 2020, one might interpret recent performance that consumer sentiment is improving as we hope that the economy will recover from the coronavirus over the next several years. This directly impacts the current value of companies traded on the stock market. If investors only thought of where companies are today, it would be unlikely that indexes would be near all-time highs – and that companies like Zoom would be the most valuable firms in the world.

While we’re still too far away to trust poll data – and polls should be highly scrutinized given what happened in 2016 – much of the same factors that investors have looked at in previous election cycles still holds true today. Examining the data that’s available, investors make long-term decisions on how companies will perform over the next several years, and then decide if they should grab a piece of that company.

For most long-term investors, this means that the tried and true method of investing of buying and holding your investments will be the best way to ensure positive enduring results.

Yes, it’s boring. Yes, it’s cliché. But it will also keep yourself out of your own head when you feel pressured to make a decision when one is unlikely warranted.

[Stay tuned for part 2, where we’ll discuss how your longevity affects your investment decisions.]

The views expressed represent the opinion of Correct Capital Wealth Management, LLC. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Correct Capital Wealth Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and the Correct Capital Wealth Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.