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Stock Market Opportunities in an Election Year

October 23, 2020 By Mircea Vasiu

Financial markets trade in tight ranges in anticipation of the most important event of the year – the U.S. elections. 

On November 3rd, the American people vote for the next President and also for the representatives in the U.S. Congress. Both decisions have tremendous implications for financial markets and the dollar. As such, the market participants did not take unnecessary risks, and ranges predominated the price action in the last several months.

However, volatility is expected to rise significantly in November. Statistically speaking, the month of November during an election year sees the volatility increasing by 30% on average – bringing plenty of opportunities to the patient trader.

Options for the Month of November

The chart above shows an interesting representation of investing in the last century. The conclusion is that it does not matter if Republican or Democrats win – what matters is to stay invested.

Indeed, both the Democrat and Republican parties have more fiscal stimulus on their agenda. Also, regardless of who wins the election, the economic problems do not dissipate after November 3rd. Therefore, as investors, playing the long game paid handsomely than trying to switch the portfolio based on political convictions.

So far, Q3 earnings show impressive results, as there is a higher proportion of companies beating estimates since at least 2010. Also, EPS growth recovered from the Q2 slump – yet another good news.

However, the market will not move until the elections are behind us. Not even the fiscal stimulus currently negotiated is not enough to shift the sentiment. More precisely, assuming we will see a stimulus deal before the elections, the market may change direction in a blink of an eye on November 3rd’s outcome.

One option for November is to wait for a market dip and add to the portfolio. After all, buying the dip has worked so far – why would this time be different?

What if there is no dip and the stock market surges? In that case, investors sitting on speculative balances (i.e., money sitting around for prices to decline) will just use the available cash for a buffer further down the road.

Anyway, a 20% cash balance is always recommended when managing a personal portfolio. Being fully invested at any one point in time is foolish, to say the least. What if a new opportunity arises and you cannot take part because of being fully invested? Or, what if a personal circumstance arises leaving you in need of cash?

November’s expected increase in market volatility will have something to offer to all investors. Get yourself prepared to take advantage of the opportunities on the horizon.