If you’re worried about how the upcoming elections could impact the markets, you’re not alone. This year’s election is likely to be more contentious than the 2000 election between George W. Bush and Al Gore (a process that took over five weeks to resolve and saw the S&P 500 drop more than 8%). Numerous lawsuits have already been filed in state courts by both parties and we’re weeks from election night. With an expected increase in mail-in ballots, we won’t likely know the winner until days after the election. Even after that, we could see legal challenges that could take weeks to resolve. That type of uncertainty could spook the stock market.
Despite Biden’s current lead in the polls, anything can happen in the coming weeks. Hypothetically though, I’ll present some pros and cons for the markets should we see the biggest change from our current party control: Biden wins the presidential election while Democrats keep the House and win the Senate.
Two of the things that Wall Street dislikes are tax increases and restrictions on businesses. Biden has already said he’d raise taxes for businesses, raise taxes for the highest wage earners, and raise the capital gains rate among other tax changes. Additionally, given the rollback in business and environmental restrictions that President Trump has made over the past three plus years, it’s highly likely that Biden would look to restore many Obama-era policies. Wall Street could view this negatively and we could see stocks drop if the Democrats sweep in November.
That said, Wall Street might like a change in Washington. Wall Street doesn’t seem to agree with Trump’s tariff policies. Typically, when new tariffs were announced, the market went down. When it appeared as though tariffs would ease, the market went up. It’s possible that Biden seeks a different trade resolution with China and our allies that Wall Street finds more settling. We may also see quicker approval of stimulus funding. While Wall Street might not like the total cost of a Democrat-led stimulus, providing money for people to spend and helping to shore up businesses could be greeted by approval from the markets.
It’s hard to say what exactly could happen to the markets as a result of the elections. Remember that the evening after Trump won the 2016 election, the markets dropped about 4%. Since then, the S&P 500 is up over 73%1.
Whether it’s fear about BREXIT, Greece going bankrupt, oil dropping from $60 a barrel into the teens, or even a presidential election, there’s often reason to worry that the markets could drop in the short term. If you’re investing in stocks, you should be doing so for your long-term goals. The markets may have periods of a month, six months, a year, or occasionally more when they decline yet the markets have historically performed well over the long term.
If your goals are long term and you believe that the markets/economy will be in a better place in 3, 5, and 10 years down the road, then stay focused on the long term. If short-term fluctuations in the market scare you or if you need money in the short term, then consider adjusting your investment mix to suit your risk tolerance and goals.
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1 Source: Morningstar.com 11/10/2016-10/13/2020
Past performance is no guarantee of future results.
Stock investing involves risk including loss of principal
All referenced indices are unmanaged and may not be invested into directly.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.
Diversification and asset allocation do not protect against market risk.
The opinions voiced in this material are for informational purposes only and are not intended to provide specific advice to any individual. Consult your legal, tax, and/or financial advisor to determine what is appropriate for your situation.
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