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The 2020 US election has been one of the most controversial to date, with uncertainty following for several days afterwards. Voters have turned out in record numbers and there are clearly strong feelings on both sides.
As with any world event, there will be an impact on the economy, and as a result, financial markets.
But how is this election likely to affect your investments?
What Has History Taught Us?
While it’s impossible to predict the future, we can look to the past to gain an understanding of how previous presidential elections have impacted investment markets.
The following chart from Financial Express shows the performance of the North American sector over the past 30 years, and how this has fluctuated with each new president.
Bill Clinton was elected towards the end of the early 1990s recession, which was thought to be a key factor in the defeat of George H W Bush. The market steadily rose until the early 2000s. Of all the presidents elected since 1945, the Clinton administration has overseen the highest return in the S&P Index1.
Next, came George W Bush. The graph seems to indicate that this preceded a dramatic fall in the economy and indeed, the S&P produced its highest losses since World War Two during his presidency. However, this coincided with the 9/11 terrorist attacks and the bursting of the ‘tech bubble’ in the early part of the decade.
Barack Obama arrived in 2008. He inherited the consequences of years of bank deregulation – the sub-prime mortgage crisis, which eventually lead to the ‘credit crunch’ and worldwide recession. While the next two years were difficult, the economy recovered stronger than ever during the remainder of his term.
Donald Trump arrived on the wave of a thriving economy. His ‘trade war’ with China created some volatility in early 2018, but this was a minor bump compared to the Covid19 pandemic which is still ongoing.
While many voters cite the economy as one of their key policy concerns, the reality is that outside factors have played a far greater role in market fluctuations than the actions of any president.
The US Economy
As of January 2020, the USA accounted for 54.5%2 of the global economy by market capitalisation. This means that over half of the share value in the world is accounted for by American companies.
For context, Japan is second on the list with 7.7%, and the UK third, at 5.1%.
Of course, these are pre-pandemic statistics, but the US dominance is unlikely to have changed significantly.
The reason for this becomes clear when we look at the top ten constituents of the S&P Index by market share:
- Apple
- Microsoft
- Amazon
- Alphabet Inc A
- Alphabet Inc C
- Berkshire Hathaway
- Johnson & Johnson
- Proctor & Gamble
- Nvidia Corp
The first four companies on the list are household names and international tech giants. Similarly, Alphabet is the parent company behind Google, which falls into the same category. While they originated and reside in the US, these are unmistakeably global companies, whose fortunes do not rise and fall on the basis of an election.
Berkshire Hathaway may not be a well-known name, but its founder, Warren Buffett, certainly is. Buffett is one of the most successful investors in the world and his principles have been adopted into generally accepted financial wisdom. These principles favour steady, long-term prospects and keen pricing rather than following trends or continually tweaking the strategy. The firm’s top holdings include several recognisable brands, such as American Express, Apple, Coca Cola and Visa.
Johnson & Johnson and Proctor and Gamble are jointly responsible for a vast proportion of the products you might find in any high street chemist.
Nvidia is perhaps a lesser known inclusion on the list, but creates hardware and technology widely used by other companies.
The pandemic may have caused chaos in several industries, such as travel and hospitality. But tech and pharmaceutical companies (which make up the majority of the top ten) have continued to thrive.
The success of these companies will always depend on a global, technologically evolving market rather than the policies of the US government. The risk of this is that it places more power in the hands of the companies than the government itself.
Your Investment Portfolio
There is a strong chance that you hold some US stocks in your portfolio. If you don’t, you probably should. This is not because the US represents an exciting investment opportunity, or the expectation that a Biden win will solve all America’s problems. It is simply down to the proportion of the global market represented by American stocks. Ignoring this vital sector of the world economy means missing out on potential growth.
When creating an investment portfolio, there are a number of points to bear in mind:
Investing is for the long-term
Investments should be considered for a minimum of five years, ideally longer. A longer investment timeframe means that you can afford to take more risks, as the likelihood is that any volatility will be ironed out over time.
Referring back to the graph earlier on in this article, you will note that while there have been several market falls over the past 30 years, the line has generally moved in an upwards direction. This is the case for the world economy generally, and is not unique to US stocks.
Holding investments for the long-term is the best way of ensuring growth. Over a 30 year investment period, short-term factors such as elections are unlikely to derail this.
Volatility is built in
When you start investing, you need to think about the level of risk you want to take. This will depend on several factors, such as:
- Your personal risk tolerance
- The returns you need to achieve
- Your capacity to cope with any losses
Investments can go up and down. A ‘down’ market is not a catastrophe. We expect it and we plan for it. Investors hoping for consistent positive returns will invariably be disappointed.
However, the worst days in the market are often swiftly followed by the best days. Historical recessions have always preceded the economy recovering stronger than before. This is why it’s important to make a plan and stick with it. It’s impossible to benefit from investment growth without experiencing some bumps along the way.
The market can’t be timed
It can be tempting to adjust your portfolio according to world events. The problem with this is that everyone has access to the same information at the same time (insider trading aside). This means that at the point you buy or sell a share, any publicly available information is already reflected in the price and it’s too late to make a profit (or indeed, avoid a loss).
Equally, we cannot always predict how these events will impact the economy in general, let alone a particular company. Investment fluctuations are largely driven by investor sentiment, which is not always logical or predictable.
Adapting a portfolio frequently is usually counter-productive. It risks selling funds when the dip has already occurred, turning a normal fluctuation into a real monetary loss. Or buying a share when it has already reached its peak. This strategy is usually more expensive, more energy-intensive and not particularly effective.
Diversification is key
We can’t control, predict or time the market. The best way to benefit from market growth, while mitigating risk, is to hold a wide variety of assets.
This means investing in a combination of shares, property, bonds and cash. But it’s also important to diversify within those categories. This can be achieved by investing across geographical areas, company types and business sectors.
As these assets don’t necessarily behave in the same way, or fluctuate at the same time, holding a wide spread can help to protect a portfolio from the worst effects of volatility.
It also means that if rapid growth occurs in any particular area, that you don’t miss out.
Given today’s 24 hour news coverage, an election can seem all-encompassing. But over the longer term, the economy moves on and unpredictable world events have a greater impact than the actions of any one leader. It’s best to stick with the plan and focus on what you can control.
Invitation
If any of the subject matter in this article concerns your own financial plan, then our team would love the chance to have a conversation with you to see how we can help. Book a free call with a member of our team today, without obligation. We look forward to speaking with you.
1 https://www.forbes.com/sites/sergeiklebnikov/2020/07/23/historical-stock-market-returns-under-every-us-president/?sh=370ca228faaf
2 https://www.statista.com/statistics/710680/global-stock-markets-by-country/