The election is just two months away, and attention to it will ramp up from here. From a seasonality perspective, it is historically common for the stock market to be soft in the September-October time frame. This is particularly the case in contentious elections when the incumbent party has a higher likelihood of losing control. However, while emotions may run high and impact market volatility, the overarching themes of the environment remain the most influential forces to returns over the intermediate to longer-term. Our upward bias remains to equities with the positives of unprecedented stimulus fueling the economic recovery, record low-interest rates, and low inflation outweighing the potential negatives of election uncertainty, tax changes, virus spread, and geopolitical tensions. For this reason, we suggest not making dramatic changes to portfolio allocations in the lead up to election day. We would recommend you maintain portfolio diversification and use any potential weakness as a buying opportunity.
Current election betting odds indicate close to a “toss-up” in terms of Presidential outcome and potential for a Democratic sweep. The gap has narrowed recently, and these odds are set to fluctuate in the weeks ahead. Also, while current polling odds may indicate current opinions, plenty can change in the lead up to election day. And history suggests these polls need to be taken with a “grain of salt” in predicting future outcomes. Many investor concerns toward the presidential outcome circulate around the potential for higher taxes. Presidential candidate Joe Biden has stated his intent to raise the corporate tax rate to 28% from 21% currently (President Trump had lowered from 35% to 21%). For this to occur, a decisive Democratic sweep would likely need to happen. And even so, the potential for higher taxes would probably not come before 2022, especially if the US economy is still recovering from COVID-19. We estimate the S&P 500 earnings impact from this move to be ~10%, with many of the more cyclical, hurt areas in the current environment feeling these effects more on a relative basis. We also believe the odds of a large fiscal stimulus package, along with lower tariffs, are increased in the event of a Democratic sweep which will offset the impact of higher taxes to a degree- and these are also likely to come prior to higher taxes.
Needless to say, the uncertainty surrounding the election outcome and its effects on the equity market is high. We remind you that emotions can create volatility for areas of the market that may or may not ultimately meet those expectations. For example, following the 2016 election, technology and health care were two of the immediate under performers; however they were two of the best areas throughout the presidential term. On the flip side, energy was expected to be a beneficiary of lower regulation and lower taxes; and though it did initially outperform through 2016 year end, it was down in 2017 despite higher oil prices (and is down -48% since 2016 election day). Additionally, financials were the biggest out performer in the immediate aftermath, but did not provide out performance from that point on through the presidential term- the sector actually trades in line with where it did in early 2017 currently.
For these reasons, making dramatic changes to portfolio allocations based on the election alone would not be wise. Try to refrain from emotional responses that alter your long term goals and objectives. Equity market volatility can occur (broadly and for specific sub-sectors), but this often ends up being an opportunity for the longer term. Keep your emergency fund in place, pay down any high-interest debts, refinance your house if it makes sense, and get yourself in a stable position, so the temporary market swings don’t steal your joy.
Remember this: Experiences and memories far outweigh worrying about who will win an election. Don’t let politics ruin your days or create sleepless nights- build a plan, stick to it, lean on us, and hug (virtually perhaps) your loved ones. Life is short; focus on the things that matter!
The information contained in this communication does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of David Adams and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification