In five months, as the U.S. election approaches, investors often find themselves navigating a complex and unpredictable market. Historically, election years have been characterised by heightened volatility and uncertainty, which can create both challenges and opportunities for investors.
Understanding the patterns and preparing accordingly can help in managing your portfolio during this period.
Historical Behaviour of Stocks During Election Years
Historically, the stock market tends to experience increased volatility in the months leading up to a U.S. presidential election. This is primarily due to uncertainty about future policies and their potential impact on the economy and specific sectors. Here are some key historical trends:
- Increased Volatility: The stock market often sees more significant swings as investors react to the potential implications of the election outcome. For example, during the 2016 election, the S&P 500 experienced notable fluctuations as the race between Donald Trump and Hillary Clinton intensified.
- Sector Rotation: Certain sectors may perform better or worse depending on the anticipated winner. For instance, healthcare stocks might react positively or negatively based on candidates' proposed healthcare policies. Energy stocks could be influenced by differing stances on climate change and energy production.
- Post-Election Rally or Decline: The market's reaction immediately following the election can vary. Often, there is a relief rally if the result aligns with investor expectations, or a decline if the outcome is a surprise. The 2008 election saw a post-election rally, whereas the 2000 election led to a decline due to the contested result.
What to Expect if Joe Biden Wins a Second Term
Excluding general polls and media influence, current data suggests that Joe Biden's administration is likely to secure a second term. This expectation can shape investor sentiment and market behaviour in specific ways:
- Continued Focus on Clean Energy: Biden's administration has prioritised clean energy and environmental policies. If re-elected, this focus is likely to continue, benefiting sectors such as renewable energy, electric vehicles, and energy efficiency technologies. Investors may consider increasing exposure to these areas in anticipation of favourable policy support.
- Healthcare Sector Stability: Biden's healthcare policies have aimed to expand access and reduce costs. A second term could mean further efforts to strengthen the Affordable Care Act and other healthcare initiatives. Healthcare stocks, particularly those involved in managed care and pharmaceuticals, might see stability or growth.
- Infrastructure Investment: One of Biden's key initiatives has been infrastructure investment. A re-election could lead to continued or increased funding for infrastructure projects, benefiting sectors such as construction, engineering, and materials.
- Regulation and Taxes: Biden's administration has proposed higher corporate taxes and increased regulation, particularly for big tech and finance. Investors in these sectors should be prepared for potential impacts on profitability and consider diversifying their portfolios to mitigate risks.
Key Considerations for Investors
Diversification: In times of uncertainty, diversification is your best defence. Spread your investments across different asset classes and sectors to mitigate risk. This approach helps cushion your portfolio against sector-specific volatility and unexpected election outcomes.
Focus on Fundamentals: While the election can cause short-term market movements, long-term investors should focus on the fundamentals of their investments. Companies with strong balance sheets, consistent earnings, and solid growth prospects are likely to weather the election-related volatility better.
Stay Informed but Avoid Overreacting: Keep abreast of election developments and understand how proposed policies might impact your investments. However, avoid making impulsive decisions based on daily news. Market reactions can be short-lived, and long-term strategies should not be derailed by temporary volatility.
Consider Defensive Investments: In uncertain times, defensive stocks – those in sectors like utilities, consumer staples, and healthcare – tend to perform better. These sectors provide essential goods and services that remain in demand regardless of the economic climate.
Evaluate Tax Implications: Election outcomes can lead to changes in tax policies, which might affect investment returns. Consider consulting a tax advisor to understand how potential policy changes could impact your portfolio and strategise accordingly.
Historical Election Years and Market Performance
Looking at historical data can provide insights into how markets have behaved in previous election years:
- 2016 Election: The market experienced significant volatility as polls fluctuated. The S&P 500 dropped sharply in October but rallied strongly after the election as investors anticipated business-friendly policies from the Trump administration.
- 2012 Election: Leading up to the election, markets were relatively stable but saw increased volatility as the election approached. Post-election, markets reacted positively as concerns over the fiscal cliff were addressed.
- 2008 Election: The financial crisis dominated the 2008 election year. Markets were extremely volatile, with significant declines leading up to the election. However, post-election, there was a rally as investor confidence slowly returned with the election of Barack Obama and the introduction of economic stimulus measures.
- 2000 Election: The election was highly contentious, leading to market uncertainty and declines. The prolonged resolution of the election results created a risk-averse environment, impacting stock performance negatively.
Preparing Your Portfolio
As the 2024 U.S. election approaches, here are steps to prepare your portfolio:
- Review and Rebalance: Assess your current portfolio and rebalance if necessary. Ensure that your asset allocation aligns with your risk tolerance and investment goals.
- Build Cash Reserves: Having some liquidity can provide flexibility to take advantage of market opportunities that may arise from election-related volatility.
- Stay Disciplined: Stick to your long-term investment strategy and avoid making drastic changes based on election predictions. Remember that markets tend to recover from election-related volatility over time.
While the months leading up to the U.S. election can be turbulent, a well-thought-out strategy focused on diversification, fundamentals, and staying informed can help manage risks and seize opportunities. By understanding historical trends and preparing accordingly, investors can navigate this period with greater confidence and resilience.