Keep Your Emotions In Check. Market-Boosting Certainty Is Coming

Keep Your Emotions In Check. Market-Boosting Certainty Is Coming
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Straight ahead of us, just weeks, this young bull market gets a boost from almost entirely unexpected quarters: America’s election. Sound crazy? Before having me committed, let me explain.

This year’s election spews angst aplenty. Even last year, alignments were steeling themselves for a chaotic campaign. Subsequent 2020 developments only magnified this. I won’t belabor you with them as they’ve been painfully shoved in your face all year long.

Acknowledging that, my advice: Go against the grain. Ignore angst.  Be calm. When the dust settles—possibly election night or sometime not too long thereafter—we get a winner and increased clarity. Uncertainty will bullishly fall. Markets love falling uncertainty, always. You want to own stocks before then.

See it this way: Trump’s 2016 win shocked many, if not most, investors. We hadn’t seen the full Trump effect yet. Most people couldn’t fathom his winning when Hillary Clinton had a seven point mid-October polling lead (per RealClearPolitics’ poll averages). Most failed to see any path to Trump’s victory. Betting markets had the odds of Ms. Clinton winning uniformly over 85% on election eve. The idea that traditional Democrat states like Pennsylvania, Michigan and Wisconsin were in play was radical. People presumed those states would vote as they had in the preceding five presidential elections—blue. They missed how red these states’ legislatures had become as I wrote about that summer. If they voted accordingly in the national races, Trump had a clear edge. That happened.  Will it again?  I don’t know.  Maybe. Same basic structure!

As I write, on October 11th, Biden has a slightly larger Real Clear Politics average (9.8 percent) polling lead. Will many be shocked if he wins? Certainly not. Still, there isn’t evidence pollsters have gotten better at identifying likely Trump voters now than in 2016. First, in battleground states, Trump is actually ahead of where he was against Ms. Clinton this same time pre-2016 election by a half a point. Second, recall that it is less how many votes nationally than where the votes are. Third, it is possible, as widely bandied, there is some sort of secret underground Trump voter cohort who won’t admit Trump support to pollsters.

Finally, in today’s hugely polarized world, do you think oodles of voters have changed allegiances? Changing allegiances means admitting you were wrong before--and in many things, and particularly political and ideological realms, that seems impossible for most to do! We keep envisioning new events as if they will sway some big pool of up-for-grabs voters. That universe is probably just a few percent. You and all your family and friends probably decided whom you support long ago.  The winner is probably he whose party best gets its base to actually vote. On that I don’t have a clue.

So where is the shock factor? Many say, “a contested election” or one where we don’t know the winner, a la 2000. But in 2000, the unclear result tied to Florida’s infamous hanging chads was a surprise. This time? Media trumpeted this for months. Many Wall Street firms forecast a “Red Mirage” of Trump leading election night but losing as mail-in ballots are tallied. Many seemingly fear Trump rejecting results if he loses--and then refuses to leave office—a fantasy. Republican leaders already rejected this. America isn’t Belarus. But the chatter helps stocks pre-price any unclear result election night.

Contested or no, we get a winner--sooner if Biden seemingly leads in electoral votes on election night, maybe a little later if Trump does. Maybe we get recounts and legal challenges with some short-term market volatility. Regardless, we will have a winner in mid-December at the latest. As clarity emerges, the uncertainty and angst stoking today’s headlines decrease. Falling uncertainty; happy stocks. 

Come January 20, either Biden or Trump is sworn in—a newly elected Democrat or a re-elected Republican. Maybe it is he whom you favor…or hate. Trump fans are sure a Biden win is a socialistic disaster. Biden fans are adamant Trump’s re-election is disastrous for democracy—and markets. For investing, you must block out these feelings.

There are 94 years of precise and accurate US market data. Those 94 years show a repeat pattern of stocks reacting to political biases—counterintuitively. Individual investors, leaning roughly two-thirds to the ideological right and one third to the left, routinely fear Democrats are anti-business and “bad for stocks.” Republicans, they presume, are good. These biases get pre-priced--baked into stock prices in advance. In election years when we re-elect a Republican president the S&P 500 hopefully averages 10.6%. And, when we newly elect a Democrat? Fearfully, negative 2.8%.

But in the inaugural year, that flips as presidents can’t ever do and never have done nearly as much as they had promised. America’s system of shared power between executive, legislative and judicial branches enforces moderation. So do looming midterm elections—in which the presidents’ party almost always loses clout.

Because of that moderation, re-elected Republicans’ inaugural years disappoint investors. Stocks then average a tepid 2.7%. But they're relieved when a newly elected Democrat has to moderate because they don’t do as much as previously feared. Their inaugural years average a whopping 21.8%! The two periods together average happy either way.

Keep your emotions in check as this election draws near. The certainty coming your way soon should relieve markets. 

 

Ken Fisher, the founder, Executive Chairman and co-CIO of Fisher Investments, authored 11 books and is a widely published global investment columnist. For more, see Ken’s full bio, here


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