The year 2020 has been riddled with uncertainty for the stock market. A global pandemic has rocked the world economies and yet, somehow markets have been on the up and up. Add the upcoming presidential election into the mix and it is a whole new game. As the current president, Donald Trump (republican candidate) stands against former vice president under the Obama government, Joe Biden (democratic candidate), we can expect the outcome of the election to be an important factor influencing the stock market.
Investors, stock market enthusiasts, and just about anybody with a stake in the matter is trying to gauge the likelihood of either candidate winning, and the scope of policies they would enact. Currently, Joe Biden is ahead in the polls and expected to win the election taking place on the third of November. However, the reliability of the polls has been under question since this time four years ago. A large factor to consider here is that American elections are dependent on an electoral college rather than an absolute majority. In the 2016 election, the discrepancy of the polls was attributed largely to the under-representation of white adults without college degrees who voted for Trump (who won the election despite losing the popular vote).
Due to such unexpected surprises the election has delivered in recent years, investors are not leaving any stone unturned while evaluating how this might affect their position in the market. Although history suggests that there is no long term impact on market returns of either party occupying the oval office, the results can lead to clear winners and losers in the short run.
Learning from history, stock markets do not really care which party takes office, but they do care if the occupants of the White House change. Stock market gains are 6.5 % in election years when a party is re-elected, compared to 5% in years where a new party takes power. However, that can be attributed to a readjustment period with no long-term impacts as previously mentioned. If one wishes to position their portfolio so as to not lose out in the short term either, this is an extremely relevant factor.
Furthermore, despite historical evidence suggesting that the party in power does not influence returns, there are perceptions associated with the policies of either party and their candidates. Traditionally, Republican candidates taking the seat are perceived to induce favourable conditions for the market owing to lower taxation and other right-wing policies.
In order to effectively evaluate how the election might impact the market, let’s consider the possible outcomes: A Trump win and the status quo continues, or a Biden win and a democratic sweep of congress.
Since the market comprises a set of extremely intricate firms affected by multiple different factors, the policies of either candidate will bring a mixed bag of results. Some industries might do better, some might do worse. Various expectations regarding either candidate’s policies have led to beliefs about certain sectors doing well under certain candidates.
Two of the most relevant sectors in the current context are healthcare and technology.
Healthcare has historically shown volatility in the period leading up to an election, especially this year. A Biden win might prove extremely problematic for this sector due to stronger democratic stances on the provision of free healthcare, drug prices, etc. This could induce uncertainty in the sector, and as we all know, the market does not like uncertainty.
The technological sector presents a contrast, in that it could benefit from a Biden administration. While both Democratic and Republican governments might impose regulations on the industry in the near future, they are likely to be more stringent under Biden, which would make it a good bet for investors.
The current scenario is, of course, unlike any from the past, due to the coronavirus pandemic. One way in which this might create complications in terms of the aftermath of the election is due to the popularity of mail-in voting. President Donald Trump has voiced his concerns regarding the increased scope of election fraud in such a context. Even during the first presidential debate, Trump reiterated that he would not accept the results of such an election due to fraud. The basis of such claims is questionable, however, in the context of stock markets, it indicates the scope of extreme volatility in the aftermath of the election, especially if we witness a Biden win.
The second factor, which was previously mentioned as well, is the tax angle. Market sentiments indicate fears against rising taxes under a Biden administration which could dampen the earnings of top companies. However, a different angle that investors might wish to consider is that companies might give out one time dividends before the tax hike is enforced. This might be useful for those looking for quick cash in.
Now let us discuss how the elephant in the room, the coronavirus pandemic, and it will fit into all of this. Trump has been cited several times about making claims regarding the vaccine. Although he has explicitly stated that electoral politics will not affect the vaccine, there is still some scope of the elections putting pressure on the race to develop a vaccine. The release of a vaccine could definitely sway electoral results and subsequently, market sentiments.
Another factor that comes into play is the stimulus package. A large part of why the stock market has stayed up despite all the hardship in the world is the influx of disposable income for a majority of Americans. The second stimulus package is currently in the Senate, where its details are being discussed. Whether or not such a package is announced before the elections will heavily influence the outcome and vice versa.
These are just some of the possible ways in which one can expect the stock market to be affected by this election. Of course, several other factors will play a role as well, especially the current inverted yield curve facing the economy which indicates a severe recession in the coming years. The response of the Federal Reserve is also a huge determinant, as it aims to keep interest rates low and sustain through high inflation to overcome the huge economic downturn post-pandemic.
In conclusion, the stock market is extremely unpredictable, especially in the year of unpredictability — 2020. It is extremely difficult to make any sort of predictions regarding its behaviour, and it is not clear whether one might be better than the other from this perspective. In order to survive this period of potential tumultuousness, investing in safe havens like gold and government bonds might be the best bet for those just looking for short-term safety. Depending on the outcome, different industries might have better short-term results such as technology with Biden or healthcare with Trump.
Varun is a third year undergraduate student at Ashoka University pursuing a major in Economics & Finance