Handicapping the election
BRIAN JACOBS, CFA 27-Oct-2020
Election season is beginning to dominate the headlines. And just as in 2016 (and many times previously), some pundits are implying that the outcome poses the single largest threat to financial markets in recent history. Consider these pithy quotes:
"We have had many important elections, but never one so important as that now approaching."
“The Republic is approaching what is to be one of the most important elections in its history.”
This type of feverish rhetoric sounds like it’s from cable TV last week. However, these quotes are actually from elections that took place well over 100 years ago in 1864 and 1888, respectively. So while the decisions we face today may loom large, it’s important to remember that the United States has survived 58 Presidential elections over the course of 230+ years.
In terms of the true impact on financial markets, it’s hard to generalize. In fact, if history has taught us anything at all it’s that handicapping an election is hard, let alone understanding how the markets will ultimately react to a new regime. Market performance under a Democrat or Republican president has been surprisingly mixed, which is encouraging for investors.
Markets should reflect the underlying economic environment, and we have had Republicans and Democrats in the White House at all points of the market cycle. It is hard to generalize these days, but we note that comments from Joe Biden regarding higher taxes might suggest the potential for short-term headwinds should he win. At the same time, this may be offset by the potential for a short-term bounce in sentiment should a Biden presidency bring more certainty of policy and stability.
On the other hand, a Donald Trump re-election could create short-term noise given the possible uncertainty of certain policy positions, which in turn might be offset by a focus on stock market performance.
Honestly, nobody knows. Handicapping elections is mere guesswork. That’s why we prefer to focus on data and fundamental analyses, as opposed to idle speculation. As growth-oriented investors we remain committed to:
- Maintaining discipline and following the same, vetted investment process.
- Allocating capital to companies that we believe are high-quality growth stories at reasonable valuations.
- Focusing on companies with strong balance sheets, healthy cash flows, and with what we view as competitive advantages.
- Taking advantage of volatility to add to high-conviction holdings whenever there appear to be price dislocations.
Handicapping elections may make for lively debate, but it should not alter an investment philosophy or process.