As election season starts to heat up, we’ve gotten a lot of questions about how the outcome of the presidential race will impact equity markets. First, we would point out that the research indicates “no persuasive relationship exists between the political party in power and stock returns.” As such, we don’t believe that what happens in November should dictate your investment strategy over the next four years.
However, we do recognize that the election presents an “event risk,” wherein one specific occurrence can have an outsized impact on the markets. Given the magnitude of this looming unknown, Deutsche Bank global chief strategist Binky Chadha recently examined how US stocks have historically performed leading up to and after a close election.
Chadha’s team found that, in the months leading up to an election where the outcome was unpredictable based on polling data, equities began to move sideways with heightened volatility. Chadha interprets this activity as a “buildup of an uncertainty risk premium,” meaning that both sides begin to prepare for a potentially undesirable outcome. Then, once the results are in, we’ve seen a relief rally as the uncertainty turns to certainty, and stocks have risen into year-end, regardless of who actually wins.
Of course, historical results are never a perfect guide for future activity, and there is no telling how exogenous variables, such as the continuing developments around COVID-19, will impact the next few months. Regardless of the political picture, our Three Dials approach has us slightly underweight equities as a firm, with a challenging employment picture and stretched valuations offsetting what has been a positive few months for investor sentiment. Our recommendation is to focus on the data over the discourse and not let an event that ultimately has an ambiguous market impact sway you from your long-term investment plan.
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