Tuesday, 13 October 2020
Written by Amirudin Hamid, Portfolio Manager of GAX MD
The United States of America, or the US, is the world’s largest economy and the most influential country in the world. Therefore, the US Presidential election is the most-watched event globally. The next US Presidential election is to be held on 3 November 2020. So, it is a critical event that investors need to deal with in the next few weeks. History has indicated that the market tends to be more volatile than usual during the few weeks before the election.
As it stands today, the national polls by the Financial Times shows that Joe Biden is currently in the lead to become the next US President. The market opines that a win by Biden is harmful to the stock market! This is all because he is planning to reverse most of President Trump's multitrillion-dollar corporate tax cut, which was one of the factors that drove the US stock market rally in recent years.
Chart 1: How are Biden and Trump doing in the National Polls?
What happened during the Hillary – Trump Presidential election in 2016?Investors should learn a lesson from the last US Presidential election in 2016. The financial market is very complex and hence difficult to predict. Four years ago, Hillary Clinton was the favourite to win the election based on the polls, and her win would have been much friendlier and favourable to the market. However, all predictions before the election were wrong. When Hillary was trailing during the counting of the ballots, investors started to panic and dumped the riskier asset classes. By 4 November 2016, the US stock market fell and lost more than 3% in less than two weeks.
Chart 2: S&P 500 before and after the US Presidential election in 2016
But things turned for the worst when most investors got caught almost immediately after the stock market made a sharp U-turn. By the election day on 8 November 2016, all the earlier losses were entirely reversed.
Eventually, the US stock made a record run during Trump’s leadership, where it hit new highs multiple times driven by an aggressive corporate tax cut and Federal Reserve policies that kept the financial market flushed with liquidity. Investors who exited out of fear that Hillary might not win were all left to regret the opportunity that was lost.
Democrat or Republican, which is better for investors?
Since there are large differerences in policies between the Republican and Democrat on certain significant issues, such as taxes, immigration and environmental. Thus, many people may argue that the financial market will also perform differently depending on whether the US President is a Democrat or a Republican.
The chart below should be self-explanatory. An investor invested US$1,000 during the time when a Democrat, Franklin D. Roosevelt was a US President in 1938. Over the course of history, he would have invested under fourteen different US Presidents, seven Democrats and seven Republicans. He would end up more than US$10 million today, a return of more than 10,000x. No matter how diverse the two parties are, it doesn't matter significantly to the stock market, especially on a long-term outlook. Despite the differences in policies, both parties ultimately have one major agenda which to build the economy of the country.
Chart 3: How much US$1,000 is worth since 1938
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We advise investors to be more mindful in the next few weeks. It is expected that in the weeks ahead of the US Presidential election, the stock market will be more volatile than usual due to the constant change in the headlines. An election is a one-off event and the market tends to quickly normalise after the election regardless of who wins it. Therefore, investors who try to time the market might get caught at the wrong end of the market momentum - selling low and buying high.
More importantly, the issue of whether the new President is a Democrat or Republican matters the least to the financial market. While it is true that both parties have considerable differences in vital issues, the US economy is hugely complex and government policies are just one part of it. All monetary policies are taken care of by the Federal Reserve, which are independent from the president’s office.
Our advice is to stay put and always invest consistently. Avoid betting on one side of the election result and stop acting based on news in the headlines. Stick to your strategy and long-term investment objective. Trump or Biden? Republican or Democrat? Whichever side that wins, they will do their best for the the US economy and the stability of the financial markets.