The money GUIDE: What the election means for your investments

It’s been a tough several weeks for investors, who’ve witnessed an uptick in COVID-19 cases and no real progress on any type of government relief. With the election now less than 40 days away, attention is focused on November 3rd.

Amidst a coronavirus infected economy, civil unrest in many cities, and a Supreme Court vacancy to fill, President Trump is trailing former Vice-President Biden by a wide margin in national polls. But a month and a half can be a lifetime in politics.  t’s way too early to call the race.  In my guesstimation, the race will tighten as election day approaches.  One thing is certain; whoever wins will have an enormous economic and social “clean up” to deal with.

Election year jitters can challenge our temperament. Market volatility is likely to be with us, and possibly even increase, in the weeks ahead. While moving out of investments can be an understandable reaction, history has shown that patience – and staying invested – has been rewarded. Stocks have moved higher regardless of which party has occupied the oval office.  

In fact, investment returns have been higher over the decade following 18 of the last 19 presidential elections, and have more than doubled in 15 post election periods.

That said, here’s a look at the three most probable election outcomes and their investment implications.

Democrats winning the White House and Senate, and maintaining control of the House would produce the greatest degree of political change. The result could be a reversal of current policy on taxes, regulation, and immigration.

The 2017 reduction in corporate tax rates from 35% to 21% provided a great tailwind to stocks.  Investors would need to evaluate the impact that a full or partial tax increase would have on overall corporate earnings. We could expect increased tax and regulations to have the greatest negative effect on the energy, technology, and telecommunication sectors.

In contrast, if Trump were to be re-elected and Republicans maintained Senate control, we could expect a continuation of current policy.  In this scenario, the current adversarial political environment would continue — on steroids.

A third outcome could be a power split, where Biden wins the election while Republicans hold onto the Senate.  The result could be a political traffic jam, where passage of meaningful legislation would become difficult – much like the second term of President Obama. This scenario has the potential to be the most frustrating and difficult to live with.

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Regardless of what happens, what a year it’s been for investors. After declining 34% earlier this year, the S&P 500 has “recovered” to post a near 0% rate of return. It’s been intriguing to note that the 5 largest companies in the S&P… Apple, Microsoft, Amazon, Facebook, and Alphabet (Google) have posted a collective 30% return, while the other 495 companies are down by 3%.  Remarkable!

With an uncertain backdrop and expected volatility, our advice is to maintain enough cash flow (income and savings) to cover your spending needs for six months.  Look for opportunities and avoid selling should the market decline. Do your best to stay calm and stay invested.