US election investment strategies: Data-driven decisions
Read what Vince Truong, US CFP?, FMVA? had to say about the upcoming US election and what it means for your investment strategies. Discover how facts, not emotions, should guide your investment decisions, especially during election periods. In this article, you’ll learn:
Facts make more 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.? Facts will help guide your investment decisions around the elections, and historical data will guide our understanding of market behavior.? 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, historical data guide us and are certainly more fact-based than 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).?
Average annual S&P 500 performance. Sourced from Fidelity (https://www.fidelity.com/learning-center/trading-investing/election-market-impact )?
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) has outperformed from the 13th of July through the 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 than larger ones.? 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.
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There are many reasons for this, and some are 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.
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Disclaimer
*This article is provided for informational purposes only and is not intended as financial, investment, legal, accounting, or tax advice. Nothing in this communication constitutes a recommendation or a representation that any particular investment strategy is suitable for your individual circumstances.
Any figures and tax treatments referenced are for illustrative purposes only and may be subject to change. Market analysis and commentary reflect the personal views of the authors at the time of writing and do not necessarily represent the views of GSB Capital Ltd. While all information is shared in good faith, GSB Capital Ltd. (DIFC Licence No. CL4377) accepts no liability for the accuracy or completeness of these comments. For personalized guidance, please consult a qualified adviser.