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How the November Election Could Impact the Markets & Your Investments

The events of this year thus far have created a lot of insecurity and anxiety around finances and the market. On the heels of the coronavirus pandemic's impact on the economy, more changes could be on the way as the presidential election approaches in November. While the past several months have proven that what happens on Wall Street is anything but predictable, we can look to some historical trends and leading experts for some insight into what the election's outcome could mean for the markets, and your investments.

Historical Insights

History indicates there is a correlation between US stock market returns and presidential election cycles. And while correlation isn't the same as causation, we can look at these patterns for a glimpse at what might be in store.

Typically, below-average returns are seen in the first two years of a presidential term, followed by well above-average returns in the final two years. Presumably, this is due to the fact that it could take some time for a newly elected president's policies to work their way through the economy. Then, in the last two years, the party is more likely to shift toward a re-election strategy, which usually includes fiscal stimulus. This economic push can create a boost that, in theory, could help the re-election chances for the incumbent party.

However, this trend doesn't always hold, especially when other major market influences are at work, such as the coronavirus this year. It's really more important to focus on long-term market fundamentals, such as corporate earnings, interest rates and labor growth and productivity to get a clearer picture. These key factors, along with an independent monetary policy, are the true drivers of the market, more so than any single election or political party.

Investment Impacts

That being said, people may be looking for reassurance when it comes to their investments this year more than ever. With that in mind, there are some considerations you may want to make concerning your allocations depending on the outcome of the November election.

As a result of the vast differences between the two parties' policy platforms, a swing toward either could mean significant impacts for a wide variety of sectors, including energy, finance, technology and healthcare. While it's not possible to predict the precise future of the markets, here's the breakdown on how the outcome of the election could potentially impact some sectors:

Biden

According to RBC's US Equity Research analysts, tech, consumer discretionary, communication services and healthcare have been positively correlated with Biden betting market trends, while financials, industrials, and oil and gas have been most inversely correlated. These correlations generally support the idea that defensive and secular growth could do well under Biden, while cyclical value-oriented stocks might not. But Wall Street will continue to reassess Biden as the election grows nearer.

Trump

Financials, industrials and oil and gas all outperformed the S&P 500 following the Trump win in November 2016, while defensive sectors lagged in the market rally that occurred at the end of 2016. Commodities might also slump if a Trump re-election means an escalation of tensions with China. Essentially, a total opposite bet of a Biden win. 

If you're interested in learning more about your specific investment situation, or in starting a financial plan, our Wealth Management team is here to help. You can get to know our Wealth Advisors and request an appointment here.


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