Market activity and US election results
Traditionally, the lead-up to and the period immediately following a U.S. election can cause some uncertainty in markets.
This year has been a bit different.
David Lane, Director and Senior Adviser for Pitcher Partners, says, “when you historically look at markets reacting to U.S. elections, in most periods you actually find that the volatility of markets increases for the three months prior to the election. That hasn’t actually been the case this year. We had so much volatility earlier in the year that last few months have been relatively modest in terms of volatility. So, you know, we can’t necessarily always predict what’s going to happen based on history, when history isn’t necessarily repeating itself.”
There are still some predictions to be made based on traditional views of parties as well as the policies each party has announced.
Mr Lane says, “if Biden gets in and there is a blue wave, there’s the potential that we could see a bit of a market sell-off on the basis that historically Democrats have not been as positive for equity markets. A number of the policies that Biden has is to increase company taxes and potentially have greater spending on healthcare.”
On the reverse though, he notes that there is some suggestion that any COVID-related stimulus package offered by the Democrats could be larger than any offered by the Republicans which could actually be a positive for equity markets.
As a whole, Mr Lane says, “I do think that the underlying economic environment, and COVID probably has a bigger impact on the outlook for markets than the actual result of the election itself.”
Timothy Rocks, CIO for Evans and Partners, agrees but also underlines that the circumstances are far from normal.
He says, “you could certainly argue that a Biden presidency would be a return to predictability in policy and general relations. I certainly agree that the blue sweep has the potential to give it more stimulus, not just in the short term, but also over the full administration if he enacts a lot of his infrastructures type sort of plans.”
A Biden presidency could also play into one of the global themes, growth in Asian markets.
Mr Lane says, “one of the geographies that we’re looking at from an investment perspective is more Asia and moving money more into Asia on the basis that the Asian economies have come out of COVID quite well, compared to the rest of the world. And potentially if we do have a Biden victory, they may well be, or he may well be more amenable to negotiating a trade with China and the rest of Asia. So, you know, we could see a bit of a positive skew towards Asia into the future.”
Positioning a portfolio during the US election
Both Mr Lane and Mr Rocks believe that investors should hold to their long-term strategy, but the environment may open some opportunities for tactical movement.
“I think this genuinely is a time that we should be defensive in our portfolios. I think we are more uncertain about the 3-5 year story for markets than we’ve ever been. You know, health crisis, what happens with vaccine, the macro. So, absolutely this is a time where you should maintain healthy levels of defensive assets, including cash and gold,” says Mr Rocks.
From a tactical perspective, both see healthcare as potentially benefitting from a Democrat victory.
“Healthcare is the one sector that will probably have the biggest impact. It is a sector that strangely enough has probably underperformed over the last six months in spite of everything that’s been going on around the world, and the general increase in government spending towards healthcare. We still see overall the sector as being good value, but there’s the potential of a short-term impact,” says Mr Lane.
According to Mr Rocks, banking and finance may also be a sector to watch as the Democratic platform has traditionally been focused in favour of regulation, with the Republicans in favour of deregulation, though neither party has promised anything either way. The technology sector may also be in the spotlight in the coming months.
He says, “there’s lots of discussion about whether the big tech titans will be subject to increase privacy rules or antitrust campaigns. But having said that it’s not clear whether the Democrats or the Republicans will be worse on that. In fact, the Republicans just announced an antitrust campaign, a suit against Google just last night. So the tech sector is probably in focus, regardless of the result, though.”
An eye to the future?
For both Mr Lane and Mr Rocks, the U.S. Election is something to monitor for Australian investors, but not necessarily something of particular concern.
“The outcome will have some impact, but given what we’ve experienced over the last 12 months, there are so many other issues at play that really the U.S. election is only one of the many things that we need to be keeping an eye on,” says Mr Lane.
Following in this vein, Mr Rocks says, “We really don’t know how severe the health crisis will be, how long-dated it will be, how successful vaccines will be, whether the macro environment will be able to continue to be relatively resilient to it. What will policymakers do? All these things are much more fundamental questions, when we think about how equity markets will perform over the next sort of three to five years.”
Main image source: Shutterstock (Matej Kastelic)
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About Kanish Chugh
Kanish Chugh is Head of Distribution for ETF Securities. He is responsible for distribution covering sales and marketing strategy for institutional, intermediary and retail clients. He joined ETF Securities in 2015 and has previous experience with Fidelity International, BlackRock and Australian Financial Review. Kanish holds a Bachelor of Commerce majoring in Finance and International Business.