We frequently get asked what the impact of the US election will be on investment returns. Will the market sell off or rally? What areas will be affected?
To be fair, these type of market events and outcomes are somewhat random and unpredictable. The polls certainly have Joe Biden well ahead of Donald Trump and the market seems to have positioned itself accordingly. That said, these same polls had Hilary Clinton well ahead of Donald Trump in the last election cycle as well. The general consensus seems to be that a win by either candidate is somewhat of a benign or non-event. The market is perhaps poised to react if the election outcome is contested or there is some drama with Donald Trump refusing to leave the white house should he lose the election.
One notable phenomenon of this election cycle is the amount of hedging that has been undertaken to mitigate losses for large investment funds. That is, if the market does sell off, many large funds (mutual funds, pension funds, hedge funds, endowments etc.) are protected to the downside. This does come with a price tag. Also, if the election result is a clear win for either party and a smooth transition these hedges do have to be unwound which could lead to some upside going into the Christmas Holidays. This, along with a return to more normal economic conditions does give us hope for optimism. “I’ve never met a rich pessimist” is a famous quote from William O’Neil amongst others.
There are a few sectors that will be impacted by a win by either party. For example, in our opinion, the Democrat’s green initiative has already set into motion large buying in renewable energy companies and the selling of carbon emitters. A Republican win could see some of these gains reversed in the short run. Even then some of this is transient as we don’t believe that pipelines, although out of favour, are going away anytime soon.
Our strategy, as most of you know, has been to stay calm and stay the course. Market moving events tend to be non-events when time is allowed to evolve. We like to refer to the Andex chart (courtesy of Dynamic Funds) below to help put everything in perspective. Time heals all wounds, particularly in the stock market. Incidentally, the bulk of the returns in the chart below is due to dividend compounding and not capital appreciation.
The chart below may be hard to see so please reach out to us if you wish to see it in a standalone format or discuss in more detail.