This has been a lousy year in many ways, and most people (myself included) expect a stressful Election Day to be its exclamation mark. But investors shouldn’t let political turmoil, or resulting stock market volatility, scare them into abandoning a long-term investment approach.
It seems almost certain that we will not know the winner of the presidential race by the end of the day on Nov. 3. The pandemic means that states are expecting a surge in mail-in ballots. While deadlines vary by state, counting these votes is sure to take extra time, even before allowing for recounts or legal challenges. Absent a massive landslide (which polls suggest is unlikely), it could be days, or even weeks, before we can determine a winner. Of course, this may not stop President Donald Trump from declaring victory earlier, but it is unlikely Joe Biden would concede while votes are still being tallied. Expect to hear the words “constitutional crisis” repeated over and over again, whether or not the description is accurate.
At this point a contested election – one in which the losing candidate challenges the result – seems more likely than an uncontested one. Given the rhetoric of each party leading up to Election Day, the loser might allege fraud (Trump) or voter suppression (Biden). Many commenters have made the point that Trump may refuse to leave office without protest, which means that the results of the election could ultimately wind up in the hands of the Supreme Court, Congress or some combination of the two.
None of this is good news. But none of it means investors should panic.
First, as The Associated Press pointed out recently, we will have a president by Inauguration Day, no matter how messy the situation becomes. The courts have historically been mindful of refereeing any disputes well before the Electoral College votes in mid-December. Even should Electoral College voting somehow break down, the 12th Amendment provides a mechanism by which the House of Representatives selects the president and the Senate selects the vice president. Granted, this hasn’t happened since 1824 and is very unlikely to happen again. But it provides an assurance that a legal dispute over the election’s outcome will not stretch on indefinitely.
Investors can also look to previous contested elections for reassurance. The most useful parallel is the 2000 contest between George W. Bush and Al Gore. Directly after the election, the stock market dropped by a small amount, reflecting optimism that the election would be decided quickly. As the dispute dragged on, more serious drops followed: By the end of November, the S&P 500 had fallen nearly 10% and the Nasdaq composite index by about 19%. But the markets ultimately rebounded once the uncertainty ended. In part, this suggests that the markets were reacting not to the prospect of either candidate winning, but purely to the uncertainty the dispute created. Of course, other variables also affected the stock market at that time. Some analysts have suggested that the November dip could have been the continuation of a downward trend that started before the election and continued for two years after it. In that view, the election was only an incidental factor to the market in the first place.
The 1876 election was contested too, even more chaotically than 2000. But the circumstances were so different that it offers little information to today’s investors. The market dipped about 10% overall during the period of that contested 19th century election, but evidence suggests the election wasn’t the direct cause. At the time, the president had much less influence over economic policy, and constant, blow-by-blow reporting didn’t yet exist. Traders didn’t seem to pay the election much mind, based on contemporary sources.
Would markets rebound after a contested election this year, as they did in 2000? The 2020 candidates are further apart on most issues than Bush and Gore were, especially social ones. But on financial and economic policy, they share more common ground than many voters may realize. Trump has staked out certain economic positions that were traditionally Democratic, including support for blue-collar and union labor, a willingness to run large budget deficits, and a negative (or at least complicated) attitude toward open markets and free trade. And Biden has a record of pushing for compromise. He was one of the most, if not the most, centrist candidates in the Democratic primaries. Under the circumstances, the markets may well be less concerned with who wins the election than with there being a winner to declare.
Once the smoke clears, will there be a significant difference in market performance under one candidate or the other? Probably not. Investors have historically overestimated the effect presidential elections have on stock market performance. Corporate profits and earnings growth have a much greater role to play. Besides, trying to time the market is never a good idea. A presidential election is no exception to this rule.
It also seems likely that the market has been digesting the possibility of a Biden presidency over the last several months, and investors do not seem to see it as a cause for pessimism. Some business leaders and CEOs actively support Biden and would find his election a net positive for their businesses, despite the potential for higher corporate or personal income taxes. If Bernie Sanders or Elizabeth Warren had won the Democratic nomination instead of Biden, I suspect there would be much more uncertainty and hand-wringing leading up to Election Day, resulting in more volatile markets.
Even in the case of contests more sharply divided by economic policy than this one, history shows that investors who sit tight after an election enjoy better performance than those who sell during the first 100 days of a new president’s term. This holds true regardless of the president in question.
While we may be in for a bumpy ride as citizens between November and January, history suggests that investors will be fine if they stick to a long-term outlook and ignore the short-term noise. Regardless of their politics, when it comes to their portfolios, investors will do best to keep calm and wait it out.