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What the 2020 Presidential Election Means for Your Portfolio

| 10/1/20 9:58 AM
5 minute read

We typically don’t mix politics with our investment commentary, but every couple of years (and definitely once every four years) we are compelled to address it. Our positioning is one that looks at what the various fiscal policies might mean for your investments. And this year—specific to the topic of tax policy—there is more disparity than ever between the two candidates. Plus, we are coming off a time period where there has been more federal spending than any time in the history of the United States. So, putting traditional politics aside, let’s take a deeper dive into this election.

 

Certifying a Winner

Let’s start with the elephant in the room: the certifying of a winner and the transition of power. Many non-partisan political strategists are projecting some degree of uncertainty as to when the certification of the election will be announced. Markets don’t like uncertainty, and this could make for an uneasy November. There is nothing fundamentally at play in the markets, other than the possibility of not knowing which leader takes to the White House at Noon on January 20. If we have a prolonged period of counting/recounting ballets, there could be some lasting impact. But the best-case scenario is that we have a clear tally of the votes by November 10, which still leaves about five trading days of uncertainty.

2016 Taught Us to Not Trust the Pollsters

Despite pollsters being proven largely incorrect in 2016, they have revised their models for 2020 and are at it again. And why not, polls help fuel the news cycle. But for us they do no more than help shape some of our positioning, or at least how we think about positioning. This is the time of year when we start placing probabilities on candidates being elected and implementing their policies (which again vary dramatically). We might not invest more in certain sectors if we think a victory by one candidate could negatively impact that sector (e.g., healthcare in 2016, defense in 2008, etc.). Interestingly, the starting point of this election looks similar to where we were in 2016, when most polls predicted Clinton over Trump; so it is not clear if the pollsters are bound to repeat themselves in 2020 (“fool us once…”). Fast forwarding to today, most experts agree there are states that are solidly Republican (Texas, Utah), and there are states that are solidly Democratic (California, New York). And when you complete that exercise across all 50 states, there are approximately 11 states that are up for grabs. For us—and your portfolio—this doesn’t mean much, but it does allow us to place probabilities on certain investments as applicable. If those 11 or so states begin to turn toward one candidate, then we might start reallocating investments into sectors that could benefit if that candidate were to win.

Incumbent Years Historically Outperform

History has shown us that the market tends to perform better when the incumbent is in the race. The run-up in the markets during an election when there is an incumbent running is typically higher, especially in September and October. This trend dates back to 1932, but what we have seen in more recent years is incumbents using their power to implement policies that benefit markets during the election year. Given the historic stimulus in the spring and summer, it will be interesting to see if there is anything more the current administration can do to boost the markets this fall. That said, the ultimate elixir will be a treatment (or cure) for the virus. Much of that is already baked into future models, with a predicted release of vaccine in 2021, but we could see a favorable market reaction in the fall if it were to arrive earlier than predicted.

Four More Years

Since 1932, the average four-year forward annualized return of the S&P 500 after an election has been 9.3%. Only three presidential elections (out of 22) have resulted in a negative forward result. Unfortunately for many of us, there were back-to-back four-year periods in 2001 to 2009. This was the decade of stagnation, but since then the S&P 500 has experienced returns in excess of the 9.3% historical average. We have also seen that you significantly miss out if you invest only when “your team” wins. A long-term investing strategy generally performs best when fully invested. Not to mention the presidential approval rating has little relevance to the stock market. Since the Kennedy administration, the sitting president has been viewed unfavorably by more than half of the country 45% of the time. History has shown us that as long as the President’s approval rating polls somewhere between 35-50%, the markets will usually perform positively. That is a fairly wide berth in our opinion.

Grandiose Pledges and Tax Policies

I imagine it is much more fun for candidates to talk about colonizing mars than it is to describe the tax credits and income exclusions in their tax proposals. Campaign pledges can be grandiose and oftentimes capture media headlines. But for us, as investors, we need to pay close attention—and hedge based on probability of election outcome—to each candidate’s policies. This is the single most important aspect of how the President can impact your investments. Not necessarily from a market standpoint, but from a wealth planning standpoint. The President’s policy can shape many aspects of your financial picture, from your income tax bracket to your capital gains rate to your charitable giving options. So, depending on where you are in your financial journey, you may need to plan accordingly for each of the various policies that could unfold. Waiting until November 3 might not be the smartest approach. No one wants to get caught flat-footed, especially when some of these new policies could be retroactive to the previous year. Like any year, it is smart to seek advice heading into year-end, to simply ensure you are taking advantage of all the currently available ways to maximize your wealth.

Apolitical

This election will no doubt be historic, and could reach a feverish pitch we haven’t seen in some time. And whether this translates to the rise of a new administration or the continuation of the current one, we have to remember that the stock market is not political. It may be used as a measuring stick by political pundits, but the act of investing remains the same: find unique investment strategies, and within large cap equities, stick with high-quality companies providing transparency on building sustainable growth, adding value, and at a reasonable price. Wrap that up with a wealth plan to ensure you are doing everything you can to maximize your strategies, and you should be in good shape—no matter who is sworn in on January 20.


As always, we appreciate your confidence in us. Please don’t hesitate to reach out to your wealth advisor for questions. 

IMPORTANT DISCLOSURE INFORMATION    

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by First Foundation Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from First Foundation Advisors. Please remember that if you are a First Foundation client, it remains your responsibility to advise First Foundation, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. First Foundation Advisors is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the First Foundation Advisors’ current written disclosure statement discussing our advisory services and fees is available for review upon request, or at firstfoundationinc.com.  Please Note: First Foundation Advisors does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to First Foundation Advisors’ web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

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First Foundation Advisors was founded in 1990 as Orange County's first fee-only advisor. Read more