Why investors should spend less time trying to avoid the dips, and more time preparing for them.

Despite anxiety, indexes rose on U.S. election

Investors have traditionally shied away from uncertainty, but it hasn't appeared to bother them in the wake of this week's U.S. presidential elections. Despite not knowing for certain who the next president would be, whether he would have to work with a split Congress or not, or just how long it's going to take to answer those questions, major North American indexes surged following Tuesday's vote. While it is still too early to tell whether the surprise rally will hold, Financial Post spoke with three portfolio managers about some of the lessons it might yield to perplexed investors.

LESSON ONE: BAD FOR THE ECONOMY MAY BE GOOD FOR MARKETS

In the lead-up to the election, a win for Democratic presidential hopeful Joe Biden with a Republican Senate was widely seen as the worst possible result for the economy. As recently as Wednesday, when it appeared that outcome was becoming more likely, Jefferies global equity strategy Sean Darby doubled down on that call due to fears that a Republican Senate would severely restrict the chances of a US$3-trillion fiscal stimulus bill being passed. That gridlock, he wrote, might lead to a flatlining economic growth.

As it turns out, investors had other ideas.

In two days, the Nasdaq Composite Index rallied by more than six per cent, a move led by the usual FAANG culprits. The S&P 500 rose more than four per cent in that same time frame, while the Dow Jones Industrial Average jumped by more than three per cent.

Picton Mahoney Asset Management portfolio manager Michael White said the markets have historically favoured gridlock. When Congress is split, the S&P 500 has offered higher returns than when both the Senate and the House are controlled by a single party.

“The market appreciates the checks and balances,” said White. “You have less concern about rampant tax hikes. You have greater comfort that the economy will be brought through the COVID-19 pandemic more effectively than under a Trump presidency but without this fear that Biden is going to come in and shut everything down.”

LESSON TWO: BIG TECH IS HERE TO STAY

Tech stocks sold ahead of the election as the final polls pointed to a strong possibility the Democrats could sweep the House and the Senate and take the presidency. The logic behind the move was that if that outcome came to pass, trillions of dollars in fiscal stimulus was on the way. That would put an emphasis on some of the most beaten-up sectors and lead to a rotation from growth to value. That market shift looked even more likely when Amazon.com Inc., Apple Inc. and Microsoft Corp. reported solid earnings and their stocks continued to sell off.

But as soon as the markets opened on Wednesday, it was clear that big tech was still in charge. On Thursday, it was no different. Apple, Amazon, Microsoft and Tesla each rose by more than three per cent, while the Nasdaq continued its stellar run with a 2.5-per-cent gain.

It's not the sheer scale of these companies that allows them to continue to thrive, JCIC Asset Management vice-president and portfolio manager Cameron Scrivens said, it's their ability to execute, to grow and stay relevant among consumers. Until they stumble, it's these companies, along with the rest of the tech sector, that will continue to push markets higher, he said.

“How many times have people called for value to come back?” Scrivens asks. “There's a lot of great companies there but the environment's not right for them. Throughout that (low-rate) environment, throughout COVID-19, throughout all the challenges we've had in 2020, big tech has continued to execute well and they've shown that their business models are bullet-proof.”

LESSON THREE: DON'T WAIT FOR A WINNER TO BUY

Investors couldn' t be blamed for choosing to stay on the sidelines before the election. After all, there was an unprecedented amount of uncertainty prior to the vote and in many ways there still is. Though Biden appears to have the upper hand, the results are close and the incumbent, Donald Trump, has indicated he could contest them, meaning it may take weeks before we have true clarity. Those who bought U.S. stocks during the last contested election in 2000 will remember that stocks fell between six and seven per cent before George W. Bush was ultimately declared the victor.

Staying on the sidelines this time, however, has already cost investors between four and seven per cent on the major indexes in two days. Those returns are the equivalent of what more conservative investors aim to make in an entire year.

“People who have held off doing anything before the election have obviously done themselves a great disservice,” said Caldwell Investment Management CEO and chief investment officer

THE MARKET APPRECIATES THE CHECKS

AND BALANCES.

Brendan Caldwell. “If you haven't been invested in tech or anything else going into this market rally you've left (907) Dow points and (144) S&P 500 points and (731) Nasdaq points on the table.”

Caldwell compared waiting for the election results to waiting for a correction. When one occurs, the investors who waited months are still hesitant to invest because of the belief that a 10-per-cent loss could become a 15- or 20-per-cent loss. Trying to be too clever with market timing will often leave investors with nothing, he said. What's proven to be more successful is implementing a dollar-cost-averaging strategy with regular contributions and ensuring that money is being put to work “regardless of what the crisis de jour is.”

MICHAEL NAGLE / BLOOMBERG FILES Those who bought U.S. stocks during the last contested election in 2000 will remember that stocks fell between six and seven per cent before George W. Bush was ultimately declared the victor.