Navigating Market Volatility During the Election
Updated: Nov 3, 2020
With tomorrow being Election Day, we will all be anxiously awaiting the pivotal results that will shape the future of the United States. Yesterday, Akane Otani from the WSJ commented on the complexities of this election, and how we cannot rely on history as a precursor to election-related market swings (especially this one). He recounts the 2016 presidential race, where most people laughed at the idea of Trump becoming president, but when he did, it sent a shock through the markets as they climbed dramatically overnight. Comparing 2020 to 4 years ago, we have no confident guess as to how the results will play out – we were surprised before, and we should expect to be surprised yet again, no matter the outcome.
So much uncertainty around who will win on Tuesday (or perhaps Wednesday… Thursday… next week???) has caused hesitation for money managers and strategists looking to deploy election-related trade ideas. With stocks coming off their worst month since March, they are in a vulnerable position heading into this week. However, it’s evident that no matter who wins the presidency, it will have considerable implications for years to come, and there will be big winners and big losers alike. So how are investors reacting?
A survey from UBS shows that about 63% of investors (with >$1 million in investible assets) have made defensive changes to their holdings ahead of this election, with most increasing cash positions or re-allocating to different sectors, and markets are already taking note.
As a “blue wave” scenario (in which Biden wins the presidency and Dems control the Senate) gains traction in the polls, long-term bond yields and smaller U.S. companies have similarly increased, with the logic being that trillions of dollars in additional coronavirus stimulus packages will help lever the economy.
But what if there is not a clear winner after Tuesday? What if this gets drawn out into next week as mail-in ballots continue to be counted/re-counted, or who knows what else may happen? That seems to be what scares investors the most, as political uncertainty might cause more societal unrest than a clear victor – over 52% of the UBS surveyors predict the market will decline in the event of a stalemate on Tuesday night.
So (in the case for retail investors) why should we have a complete overhaul of our portfolios, simply based on polls and policy, if we don’t truly know what will happen regardless if there is a clear winner or not? People thought a Trump presidency would bolster energy and financials, yet these were the worst performing groups in the S&P since his inauguration (due to the collapse in oil prices and low interest rates). If Biden wins, should we make drastic allocations to treasury-related instruments? No. The short answer, in either case, is that it is not a great idea to make any decisions that will have long-term impacts on your investment strategy from a short-term event like an election.
The past few years have been complex, and if investors learned anything from this (in a pure markets standpoint), it’s that winning bets are tough to predict, and close-to-impossible to time correctly. Whether we do have a “blue wave”, or if this election is a repeat of the last, the markets will normalize as they always have. Try to ignore the noise as much as you can and focus on the areas in which you can control (such as saving or re-evaluating your risk tolerance) and then go from there. Remain calm and level-headed throughout this week and the rest of this rollercoaster year, and you’ll reap the benefits beyond your investments.