The Market Reacts to the Election

 In Investments, News

As expected, this year’s presidential election results arrived later than usual. Uncertainty remained the day after—and the day after that. But after the following weekend, former Vice President Joe Biden was widely acknowledged as the President-elect. And it looks likely there will continue to be a split Congress. The U.S. stock market jumped the day after the election—before there was a clear winner. In fact, the S&P 500 Index had its best post-election day since 1952 (see the chart below). With election uncertainty still remaining, COVID-19 cases surging, and an economic recovery slowing, you can be forgiven for scratching your head a bit in seeing this response from investors.

The immediate market reaction bears some explaining: Strong market moves generally suggest the market has been surprised. In this case, it seems investors had been pricing in a higher probability of Democrats winning a unified government—a so-called blue sweep. Biden’s stated tax policies would hit corporate profits, and he has promised other far-ranging policy changes. Markets don’t typically relish dramatic change of any kind, so stocks were trading lower, reflecting the market’s collective view of the future. But with the Republican Senate likely to remain a check on power, an aggressive Democratic legislative agenda is likely off the table. Thus, a split Congress was seen as a positive by Wall Street. Part of the market’s reaction likely derived from this assessment. Also, the worst fears of a contested election and serious legal challenges to the result have, so far, not come to pass.

We, and most other investors, would not have guessed the market would have such a strong response, regardless of the election result. It just goes to show that even if you can predict the outcome of an event like an election, you can still get the prediction of how the market will react wrong. As we mentioned in our November 5th blog posting, we advised caution in making major portfolio changes in advance of the election. We noted that we did not have a “crystal ball” and that history tell us the linkage between an election result and a market impact is not always clear.

This is why we are not willing to position portfolios around an election result or any single event. There are too many other variables that impact investment returns. In our analysis, we focus on the fundamentals and valuations that matter most long term. And we construct portfolios to be resilient across a wide range of possible macro outcomes that could play out over the next few years, not days or weeks, regardless of the outcome of a particular election.

Over 22-plus years of managing money for clients, we’ve developed a healthy respect for the short-term unpredictability of financial markets. We have much greater confidence in our long-term investment views and allocate our clients’ portfolios accordingly.

Over the next several months, the trajectory of the markets, the economy, and our society as a whole will remain highly dependent on the path of COVID-19 and our response to it. But there have been positive developments just in the last week. Strongly positive vaccine news was announced, giving a further boost to global stocks and economic forecasts. And if political agreement can be obtained, an additional stimulus package could come before year-end and help individuals and the economy until COVID-19 is controlled. Of course, there may also be surprises coming out of a lame-duck legislative session in the next two months. As long-term investors, we always try to take a balanced view of the risks and opportunities.

We appreciate the trust our clients place in us, especially during these challenging times. We encourage you to reach out to our team if you have questions about your portfolio or want to discuss recent market events. If you do not currently have an trusted advisor, please contact us so we can learn more about your goals and objectives and to discuss how we can help you and your family.

Certain material in this work is proprietary to and copyrighted by Litman Gregory Analytics and is used by River Capital Advisors, L.C. with permission. Reproduction or distribution of this material is prohibited and all rights are reserved.

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