With the US election less than 100 days away, what are your concerns? Will the likely election of a Democrat as president make markets nervous, or will Donald Trump’s replacement add confidence for the future? What should we as Canadian investors consider?
Most polls point to a decisive victory for Joe Biden, the alleged Democratic presidential candidate. Bettors also have Mr. Biden as the favorite to win on November 3.
But whether a Biden win will be good or bad for the stock market depends on who you ask. Mr Trump, as one might expect, warned that stocks would “fall apart” and “fall to nothing” if he loses. His hyperbole aside, some investors fear that Mr Biden’s proposals – including his plan to raise the corporate tax rate from 21% to 28% – could deal a heavy blow to the economy as she is recovering from the coronavirus pandemic.
But concerns about a Democrat becoming president are almost certainly overstated, for several reasons. First, the stock market is looking to the future, so market sentiment should already reflect, at least to some extent, a Biden victory. Yet, as Mr. Biden’s lead widened to double digits in many polls, the S&P 500 has not fallen; it is up about 48% from its March low – not the kind of reaction one would expect if investors were terrified of Mr Biden becoming president.
Second, given the fragile state of the economy – and the fact that political platforms are often subject to compromise after an election – Mr. Biden is unlikely to try to implement reforms that could carry a blow to the economy.
“Even in a scenario where Democrats sweep the 2020 election… we still think we’re unlikely to see any short-term fiscal tightening measures,” said Tom Porcelli, chief US economist at RBC Capital Markets, in a note this week. .
“In fact, if recent House bills are any indication … the path of least resistance if Democrats sweep [the presidency and both houses of Congress] in November, it’s a lot, a lot more fiscal largesse, ”to stimulate growth, said Porcelli.
JPMorgan Chase & Co. issued an equally optimistic note about a Democratic victory. “Given the current economic weakness, business recovery and job growth will likely be prioritized over policies that could dampen economic growth and possibly even undermine the desired outcome of the 2022 midterm elections.” , JPMorgan strategists, led by Dubravko Lakos-Bujas, said in a July statement. Note. ” We see [Mr. Biden winning] also neutral to slightly positive. “
Even if the market initially sold off, history suggests the damage would be short-lived. In the five cases since World War II, when Democrats swept the presidency and Congress, the S&P 500 fell an average of 2.4% in November after the election. But the index gained an average of 10.4% over the following calendar year, with just one drop, according to CFRA Research data reported by CNN.
A more pressing risk is the market reaction if the election result is challenged. Given Mr Trump’s call this week to postpone the vote, his complaints about the postal ballots and his refusal to say whether he will accept the results, it is possible that he will not. quietly if he loses. Markets hate uncertainty more than anything, and such a scenario could shock investors. In 2000, for example, within five weeks of election day until George W. Bush was declared the winner after a recount in Florida, the S&P fell 12%.
With the coronavirus, widespread social unrest and the unpredictable nature of Mr. Trump all creating a volatile electoral backdrop, a lot could happen by election day. It is also possible that Mr. Trump could prove again that the polls were wrong and win a second term, although he would have to overcome Mr. Biden’s lead to do so.
But my advice is the same now as for any other year, choice or not: hold a diversified portfolio of high quality stocks (or low cost funds), keep some of your capital in guaranteed investment certificates or bonds, and have cash available for emergencies.
Eventually the pandemic will recede and, perhaps with the help of new leaders, the chaos in parts of the United States will pass and the economy will recover from its worst crisis since at least the 1940s. the long term and resisting the urge to change strategy based on an election – or any other short-term event – is the surest way to build wealth.
Send your questions to [email protected]. I am not able to respond to e-mails personally, but I choose certain questions to answer in my column.
Special for The Globe and Mail
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