By: Tim Chubb, Chief Investment Officer at Girard, a Univest Wealth Division
Many of our clients have been voicing concerns about the upcoming election. The common question is if they should pull out of the stock market until after the election. Does it make sense to sacrifice potential gains in favor of protecting current assets? To answer this, there two things worth addressing – the first is the election and the second is market timing.
With regard to the election, prediction markets are suggesting a Democratic sweep to control the White House, Senate, and House of Representatives. It is important to keep in mind that the market is forward-looking and I believe investors are generally aware of how Democrats have performed in polling recently, therefore, election results may not come as a surprise to investors and cause nearly as much volatility as some are concerned.
That being said, the Senate is very much up for grabs. If the Republicans are able to retain control, it could lead to more ‘status quo’ despite who ends up in the White House for the next four years. The Republicans currently have a 53-47 Senate majority but have 23 seats up for re-election in November while Democrats have just 12 seats up for re-election. The latest polls and prediction markets indicate the Democrats are likely to capture six seats and lose one seat for a net gain of five seats which is enough to gain majority control of the Senate for the first time since 2014. However, as is the case of the presidential election, the winners of close Senate races may not be known until well after Election Day when all the mail-in votes have been counted – a unique characteristic for the election this year due to COVID-19. Meaning, it could be some time before the market reacts, if at all, since the results may not be clearly known immediately.
Although Presidents can implement executive orders, legislation requires Congressional approval hence the importance of unified control under a single party of both legislative and executive branches. This makes the Senate the race to watch.
So far, the performance of stocks that are sensitive to a potential increase in corporate tax rates has not reflected the changing probabilities of the election outcome while healthcare stocks have underperformed of late. This leads us to believe that the market is still digesting this potential outcome and is more worried about the economic rebound than the election.
The major consequence of a Democratic sweep is the proposed tax policy which has garnered the most focus from investors thus far. While higher corporate taxes will reduce corporate earnings, there could be other policy measures that offset some of these losses such as a softer stance on trade policy, greater government spending, and other policy measures. With the economy on shaky footing, it is possible the Democrats will wait a few years before attempting to push through policy that would hit corporate earnings.
With regard to market timing, our mantra has always been to stay invested, stay disciplined, and take advantage of volatility in the market. Market timing, while tempting, involves getting two nearly impossible decisions right – when to sell and when to get back in.
As a long-term investor, trying to time market tops and bottoms is a fool’s errand and the evidence is overwhelming that most investors diminish their long-term returns trying to do so. Investors become more likely to chase the market up and down, getting whipsawed, buying high and selling low.
Through the end of last year, $100,000 invested in the S&P 500 from December 31, 2004 until December 31, 2019 has led to 9% per year in performance, growing that sum to $364,180. If an investor missed the best ten days, the return was only 4.13% per year – or $183,850 at the end of last year. In time, this problem has significant consequences as the next 50% move higher in the S&P 500 lengthens the gap between the person missing those ten best days and being fully invested by ~$271,000. We would recommend rebalancing into this weakness, hoping to take advantage of a volatile market environment and possibly catch some of the best prices in the market cycle.
The bottom line is the U.S. stock market has been resilient throughout its history and stocks routinely recover from short-term crisis, just as they have as recently as the March lows. By trying to predict the best time to buy and sell you may miss out on the market’s biggest gains, making the decision more costly than taking the speed bump in the first place. On Election Day, we’ll all wake up and trends like consumers buying more groceries online, companies spending more on cloud infrastructure, and folks going to the hardware store will still be relevant, making for exciting times to be an investor in our country.
We look forward to sharing more in the coming months as details become clearer on policy. While we’ll be watching the presidential and congressional elections, the economic recovery is a more important priority and focus for the market right now.
Given the ongoing changes due to the global pandemic and the significant investment implications, working with a financial advisor can help you navigate the market and create an investment strategy that matches your time horizon and risk tolerance. To have a conversation about your financial goals and how we can help, please reach out to a Girard advisor.
This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. The information in this article, and any opinions expressed therein, do not constitute a recommendation or an offer to buy or sell any security or financial instrument. Viewers should consult with their financial and/or legal professionals before making any financial decisions.
Any index or indexes referenced are not managed and cannot be invested in directly. Past performance is no indication or guarantee of future results.