US election (Trump vs Biden) 🆚 Stocks

 

 

The Chinese use two brush strokes to write the word ‘crisis.’

One brush stroke stands for danger; the other for opportunity.

In a crisis, be aware of the danger–but recognize the opportunity.

: Kennedy

 

 

US election matter for stocks. Besides being the foremost military power of our era, the US has a 16% share of global GDP. The elections matter more for markets as the US stock market is 66% of the MSCI World Index. Sentiment in the US markets translates to sentiment globally. To put it practically, everyone watches the Fed, while only those invested in India watch the RBI.

 

It also matters for fund flows. Foreign Institutional Investors are a big part of the investment capital pool in India. And their sentiment is driven largely by what’s happening in the US.

 

For better or for worse, election cycles and stock market cycles have a linkage. The hypothesis is straightforward – a booming stock market is considered to be a marker of a booming economy or prosperity and reflects well on the incumbent administration. So people in power have an incentive to nudge policies that will be deemed good by the stock market. This is true everywhere – even in India, we see an additional policy effort to push markets up before elections 🙂

 

Numbers run by Dimensional Fund Advisors found that the intuition holds in reality. Of the 23 US election years since 1928, 19 election years had a positive stock market return. Historically, 83% of the time, S&P500 returns have been positive in an election year in the US. The average positive return from the 19 instances that the S&P500 was up was 17%. The odds that S&P500 will have a positive return in any given year is 74% which is much less than the odds for an election year.

 

 

Other implications of looking at market cycle returns in conjunction with the US Presidential cycle are as follows –

 

1/ The 1st year of a new US presidency is the worst for the markets in the 4 years US presidential cycle. If the same party wins the average returns have been 6.5% vs 5% if a new party comes to power. Intuition: new president brings uncertainty which markets don’t like.

2/ The 3rd year of a presidential cycle is usually the best for the market. Intuition: policy changes to boost the economy start getting announced in the 3rd year and markets respond to announcement and then adjust to the implementation of the policies later.

3/ In 11 out of 13 postwar elections the party in power won if the markets were up from July 30th to Oct 31st. Intuition: recency bias. If the recent past has been good, the impression is that the leadership is turning things around or making things better, which are both favourable to the party in power.

 

 

Here it is important to note that just because odds are favourable does not mean this happens in every US presidential cycle. But the takeaways for investors are clear. The easy win of the post-COVID crash rebound is done now. The path forward will depend on many uncertainties – when do we find the vaccine, how widely it is distributed and who gets to lead the largest economy in the world.  So if you have gone heavy into equities after seeing the Apr – June rally, it is time to take a pause. The road ahead may not be as smooth. It definitely is the right time to bank your gains and go back to your long term asset allocation.

 

In this episode of Kuvera Insights, Anup, CIO & Joint CEO – IIFL AMC, Pooja, Asst Editor and Podcaster – Forbes India and I discuss the advantages that time in the market could bring you when compared to trying to ‘time’ the market.

 

Happy investing,
Gaurav
CEO | kuvera.in | @rustapharian

 

 

Interested in how we think about the markets?

Read more: Zen And The Art Of Investing

 

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