As investors await the outcome of the 2020 elections, it is worth having a look at some of the things investors do during and after an election year.
The knife-edge race continues with, at the time of writing this article, a Biden presidency and a Republican Senate possible. If that is the case, the fiscal stimulus the market expected will be far less than thought. However, the stock market rallied and still does, especially the Nasdaq 100 index. The explanation is that a Biden presidency would not threaten the big tech companies like the Trump administration did lately.
Only that could change in a blink of an eye, as not all votes are counted yet. While investors still struggle to position for the period ahead, let us have a look at what an election year brings from a stock market investor’s point of view.
Things to Expect in an Election Year
The first thing to consider is higher volatility throughout the election year. This year the volatility was extreme also due to an exogenous factor – the COVID-19 pandemic.
Because of the high volatility seen in an election year, investors prefer to take some “chips” off the table. More precisely, they reduce the risk exposure in their portfolios.
This translates into stock market outflows during the election year and up to Election Day, and inflows into money market funds (i.e., low-risk asset classes). However, the general tendency is that the year that follows an election year sees the exact opposite – funds pour in back to the stock market and out of money market funds. As such, the shot higher in equities following Election Day might be related to investors already positioning themselves for 2021.
Another thing to consider is that, statistically, the stock market delivered positive returns in the last two-and-a-half decades, regardless of who won – the incumbent president or the new candidate. As it turns out, this year is no different, albeit there are still some trading days left.
All in all, if there is the possibility of investors to deviate from their long-term investment perspective, the likelihood is that this is seen during election years. However, considering the equities’ historical performance in such years, the best thing to do is to remain invested during the election years, for best portfolio performance.