Election outcomes

Are there tactical moves to make for active investors after the US election?

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Key takeaways

  • Joe Biden is expected to receive over 270 electoral votes and succeed Donald Trump after the 2020 US presidential election results are finalized.
  • The full makeup of the US Senate remains unclear.
  • You may not want to alter your long-term strategic outlook, but there may be some tactical moves to consider.

More important than elections

At Fidelity, we think you should build a diversified portfolio that aligns with your investing objectives and risk constraints. No matter what your age or objectives, we believe this means being diversified both among and within different types of stocks, bonds, and other investments. One benefit of diversification is that it can help you manage your risk.

Major news outlets, including the Associated Press, called the US presidential election in favor of Joe Biden on November 7, and many investors are evaluating how that might impact their investments. The full results may not be final for weeks, and while Democrats will still control the House of Representatives, the final makeup of the Senate will remain unknown until January. Which party controls the Senate will be key to the president-elect’s ability to achieve his agenda.

First and foremost, election results should not drastically alter your strategic, long-term plan (see More important than elections sidebar), given that economic growth drives investment outcomes more than politics. Fidelity believes we are in the early stages of recovery from recession, and continued fiscal and monetary stimulus would help keep that going.

With that said, if you actively trade (regardless of what’s happening in the political world), or you are looking to make some tactical, short-term moves in the wake of the elections results, here are a few things to think about.

Beyond Biden and the Senate

Having reached over 270 electoral votes, Joe Biden is poised to become the 15th vice president of the United States to eventually become US president. Meanwhile, several Senate races remain undecided—including 2 pivotal races in Georgia that appear headed to runoffs in January. As a result, it is unknown which party will control the US Senate at this point. Democrats look like they will lose seats in the House of Representatives, but will retain control of that chamber.

Several other impactful votes took place on election day in the US, including races for state governors, state legislatures, and a variety of ballot measures. In particular, the outcomes of some of these ballot measures may directly have significant implications for businesses in select industries.

What history tells us

Given how unique the current investing climate is, historical trends may not have the predictive power that some might hope to ascribe to them. Nevertheless, if you like to look to the past to judge the future, history shows that US stocks tend to move sideways in the time between an election and when the president-elect of a new party takes office.

According to CFRA Research, in the 9 preceding times this has happened since World War II, the S&P 500 declined an average of 0.1%. This result is largely skewed by the election that took place during the financial crisis, when there was a 20% decline in the period between President Obama’s election in November 2008 and when he took office in January 2009 (the median return was a gain of 2%). Additionally, when the party in the White House switched from Republican to Democrat during this time frame, the S&P 500 fell an average of 2% (the median return was a positive 1.5%).

S&P 500 returns after changes in presidential party

President & Party S&P 500
Election Inauguration Out In % Change Rise?
11/4/1952 1/20/1953 Truman Eisenhower 6.3% 1
11/8/1960 1/20/1961 Eisenhower Kennedy 8.8% 1
11/5/1968 1/20/1969 Johnson Nixon -1.4% 0
11/2/1976 1/20/1977 Ford Carter -0.1% 0
11/4/1980 1/20/1981 Carter Reagan 2.0% 1
11/3/1992 1/20/1993 Bush-41 Clinton 3.2% 1
11/7/2000 1/20/2001 Clinton Bush-43 -6.2% 0
11/4/2008 1/20/2009 Bush-43 Obama -19.9% 0
11/8/2016 1/20/2017 Obama Trump 6.2% 1
Average return:       -0.1% 56%
    Democrat Republican 1.4% 60%
    Republican Democrat -2.0% 50%
 

Source: CFRA, S&P Global.

Of course, these historical trends do not mean history is destined to repeat itself. More importantly, the exogenous threat of escalating COVID-19 cases, along with the development of potential vaccines and therapies, dwarfs historical trends. It remains critical for active investors to monitor trends in new infections and mortalities associated with the coronavirus pandemic.

Investing implications for potential policy shifts

If the magnitude of government spending continues (or increases from current levels) and low interest rates persist, as many expect, Jurrien Timmer, Fidelity’s director of global macro, points to stocks outperforming bonds and growth stocks outperforming value stocks during such a policy mix in the past.

Additionally, if some recent tax policies are reversed in order to help fund government programs, that hasn't necessarily been bad for stocks.* That’s likely because tax hikes often coincide with periods of rising government spending, which tends to stimulate the economy. Moreover, if you are thinking about how potential tax changes might impact you, there are ways to help manage your tax bill. Still, you should never let the tax tail wag the investment dog, so don't base any investment decision solely on tax considerations.

On a sector/industry level, potential changes in regulation could lead to some active investing opportunities. Consensus expectations are for a Biden administration to attempt to tighten regulations on fossil fuel, health care, defense, banking, and financial services businesses. Industries that could potentially benefit from a Biden administration’s policies, if enacted, include utilities, renewable energy, managed care providers, and infrastructure builders.

Of course, active investors who like to employ a sector rotation strategy with some percentage of their investment portfolio would need to consider if potential policy shifts will actually come to fruition, given the possibility of a divided congress and potential legal challenges to a Biden administration's attempted regulatory shifts. It’s also worth noting that several of the aforementioned bullish and bearish outlooks associated solely with policy shifts for certain sectors and industries conflict with those associated with seasonal trading patterns that some active investors adhere to, such as “Sell in May and go away.

A way to potentially capitalize on your outlook as well as hedge some of the risk of policy shifts not being fully realized is to consider utilizing options strategies, such as purchasing calls—which grant the owner the right, but not the obligation, to buy an underlying stock at a predetermined price during the life of the contract.

What investment strategy should have your vote?

Make a plan, stick with it, and rebalance investments when you need to. From an investing perspective, this approach will help you achieve better outcomes more than worrying about who controls the White House or Congress. And if you are an active investor, don’t forgot to think about the long view even as you are making tactical moves.

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