No need to make big changes to investment strategies because of election
As we look ahead to the US presidential election in November, many will be pondering how this might influence the investment outlook.
While financial markets are sure to be affected, there’s no need for any dramatic portfolio adjustments just yet.
The US economy can perform well under governments of all shapes, and sharemarket returns have typically been solid in the face of political uncertainty.
The election is eight months away, but March is an important month on the US political calendar.
In just a few days it’ll be Super Tuesday, which is the day the greatest number of states hold presidential primary elections and caucuses.
These primary elections are held by the political parties themselves, to choose the candidates who will represent them in the election.
Super Tuesday is usually the day it becomes clear who will be running for the Democrats and the Republicans.
With primaries taking place in 16 states next week, we should see Joe Biden and Donald Trump cement the nomination within their respective parties. That would set us up for the first presidential rematch since 1956, when President Dwight D. Eisenhower (who was the incumbent at the time) faced Adlai Stevenson.
Eisenhower won that one, but, like Biden today, he faced questions about his ability to serve a full second term.
Many Americans believe Biden (already the oldest president in history, who would be 86 at the end of a second term) is too old to go another four years.
Despite that, the Democrats will back him to run again.
In 200-plus years of US elections, the incumbent party has won 58 per cent of the time. When the sitting president is running, that increases to 69 per cent.
Biden is in the box seat, at least according to history, and his party will be reluctant to go against those odds.
That said, recessions tend to have the pendulum swing back in favour of the opposition, so the economy could have a big influence on the outcome in November.
Another problem for Biden is his approval rating, which fell to 38 per cent in a recent poll. That’s just above his alltime low, and well below the levels that typically mean a high chance of reelection.
The betting markets have been close to 50-50 in recent months, although Trump has the edge at the moment.
For share investors, there’s no need to make any big changes to your strategy just because it’s an election year.
The market can still perform quite well, despite the uncertainty that always comes with a potential change of leadership. In the 21 election years since 1940, the S&P 500 index has risen on 18 occasions.
This 86 per cent hit rate of positive returns is above the long-term average of 77 per cent (for all years since 1940).
The three instances of US shares declining in an election year were 1940, 2000 and 2008.
The first of those was during World War II, while 2000 and 2008 were about the time of US recessions, namely the bursting of the dotcom bubble and then the GFC.
While election years have typically meant a better chance of a positive return, the average gain of 9.8 per cent in those 21 calendar years is slightly below the average of all years since 1940.
The seasonal pattern has also been different, with election years often proving softer than usual during the first half, then with the gains coming through stronger in the second six months.
Next week, Super Tuesday should tell us what we already know — that we’re headed for a Biden v Trump rematch.
Two days after that, President Biden will give his State of the Union address. This is a crucial opportunity for Biden to reset and revitalise his flagging popularity.
There’ll be more to say in the coming months about how to position portfolios before the US election, but for now we’ll watch the polls closely in the wake of these key events.
In the meantime, don’t let your political feelings override your investment judgment.
Mark Lister is investment director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision, Craigs Investment Partners recommends you contact an investment adviser.