Don’t Make Rash Decisions Due to Election Uncertainty

While the next president is still unknown, past experience offers valuable perspective on how either outcome will likely impact markets.

In the near term, market volatility might remain high as traders try to game intraday momentum on each new headline. However, for investors with a long-term strategy, we think the winner is less of a market catalyst than the economic recovery. Over the next few quarters, economic activity will be more influenced by the timing and efficacy of a vaccine for the coronavirus than a potential change in administration. Although there is always a lot of focus around the U.S. presidential election, we have found that the subsequent market returns for the three years after the election are determined more by the broad economic trends in place than by whichever political party is in power.

Before markets open, former Vice President Joe Biden has a narrow lead, but it could take several days to tabulate votes. Key states in the Senate and House races are still counting. One scenario, which is a possibility right now, is a Biden win combined with a Republican hold on the Senate. We thought that if either Trump won or if Biden won along with a Democratic Senate, that the chances of another stimulus in 2021 were quite good. By contrast, the prospects for a large stimulus in a Biden win with a GOP Senate outcome look poor.

Given that we have at least one, and probably two Georgia special elections in January, there is some chance we won’t know for some time.

If President Trump succeeds in re-election, we expect gridlock between the executive and congressional branches of government, given that the House looks all-but-certain to remain in Democratic hands. This dynamic will limit the president’s ability to make significant changes from the current status quo with regard to economic policy.

If Joe Biden succeeds in ousting Trump from the Oval Office, his ability to institute major policy changes will be limited by whether the Senate is controlled by the Democratic party. Yet, even with Congress under Democratic control, the scope of Biden's policy changes will be dictated by the size of the majority, as some centrist Democrats might not be willing to enact certain policy changes.

For example, we expect the corporate tax rate would increase if Biden wins the presidency and Democrats win back the Senate, and we note this would be a headwind for stocks in the near term. Depending on the size and scope of the tax package, aftertax earnings could decline anywhere between 5% and 9% for U.S. corporations. However, given the recent pullback in the stock market since its recent high in early September, the market is already pricing in a heightened probability of a corporate tax rate hike. Based on the fair value estimates as determined by our equity research team, we continue to see the most attractive opportunities for investors among the small-and mid-cap stocks, especially in the value category.

For long-term investors who are comfortable with the risk profile of their overall portfolio, we recommend against rashly making any significant revisions based solely on the election results. For most investors, long-term financial success is determined more by time in the market than by timing the market.