As Election Uncertainty Sweeps Markets, The Pros Hold Steady

Consider 2000, when the S&P 500 dropped 5% in about five weeks after Election Day before Al Gore conceded to George W. Bush. That, though, also happened during the near-halving of the S&P 500 from March 2000 to October 2002 as the dot-com bubble deflated.

HOW BAD WOULD A CONTESTED ELECTION BE FOR THE MARKET?

If one were to happen, strategists at Goldman Sachs say the S&P 500 could fall to 3,100 in the near term. That would be a drop of 11.1% from Wednesday’s close. Compare that with the 3,700 level for the S&P 500 that Goldman Sachs expects if the election were to yield a divided Congress and 3,400 if Democrats were to sweep the House, Senate and presidency.

Even if the outcome is contested, most of Wall Street expects a clear winner to eventually emerge for the White House. Whoever it is, many investors say the resolution of the market’s heavy uncertainty should ultimately help it rise afterward.

IS WALL STREET DOING ANYTHING TO PREPARE FOR SUCH A SCENARIO?

David Jilek, chief investment strategist of Gateway Investment Advisers, noticed growing expectations last month among investors for volatility in the stock market, not only in the October run-up to Election Day but also in November, December and even in January.

Jilek was measuring their concern by watching pricing climb on futures for the VIX index, which measures how much volatility traders expect from the S&P 500. VIX futures for January hit a peak late last month, after Trump indicated he might not accept the outcome if Biden wins.

Some of that may have also been due to worries about the possibility of increasing coronavirus infections as the weather turns colder. But VIX futures have come down recently after polls showed Democrat Joe Biden widening his lead over Trump, which would increase the odds of a clear winner being known earlier.

SO WOULD A DEMOCRATIC WIN BE BETTER FOR THE MARKET? REPUBLICAN?

In the end, many professional investors say it likely doesn’t make that much of a difference. Going back to 1933, the S&P 500 has had an average annual gain of 12.9% under an entirely Republican-controlled Washington and 9.3% under Democratic control. The best returns have historically come with a split Congress and a Democrat in the White House, though a split Congress with a Republican president has been just a hair behind.

Presidents get both far too much credit and far too much blame for whats happening in the economy and the markets. said Darrell Spence, an economist at Capital Group, which manages more than $1.7 trillion.

The U.S. economy is large and complex, so there is a limit to how much a person or policy can really move that around. For example, tax cuts or increases only really impact growth at the margin.

BUT WHAT IF I AM SURE A DEMOCRATIC WIN WOULD BE BETTER FOR THE MARKET? OR A REPUBLICAN ONE?

Making big changes to your investments based on expectations for a political outcome is essentially placing a bet upon a bet upon another bet, said Rich Weiss, chief investment officer of multi-asset strategies for American Century Investments.

First, an investor has to bet correctly that either Trump or Biden will win. Second, the winner has to bring about the policies the investor expected. Third, the investor would need to correctly guess the timing of those policies.

To get all three, the sun and the moon and stars all have to be perfectly aligned for you to make money on that bet, Weiss said.

SO THE BEST BET IS JUST TO TUNE OUT THE SHORT-TERM NOISE AND STAY THE COURSE?

That’s what many professional investors are doing. The memory of Election Night four years ago is still fresh. Markets initially tumbled following Trump’s surprise win. But within a couple hours, they spun 180 degrees to march higher.

Even if you have a good crystal ball and know what the policies are going to be, its not obvious how the stocks are going to react, said Columbia Threadneedles Montanus.

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