Investing

Surviving Another Election

With the state primaries in full swing, election coverage will be in our faces for the next eight-plus months. Election years are definitely not one of my favorite years. The non-stop coverage is quite fatiguing. Allow me to add to the fatigue but from an investment market perspective.

Two years ago it seemed a foregone conclusion that the current president would be reelected. However, after a trade war, a pay for play scandal and impeachment proceedings, it feels like a worthy challenger to the sitting president has not an insignificant chance of winning, at least that’s how it appears from my relatively uninformed perspective. FULL DISCLOSURE: I’m not political analyst by any stretch of the imagination. As a matter of fact, I try avoid politics as much as possible.

While you shouldn’t let politics dictate your investing, you should understand how they can impact investment markets so you can be informed and prepared to not respond rashly. Let’s take a look at some different scenarios to get a feel for what could happen.

Scenario #1: The current president gets re-elected

For now, this still appears the most likely scenario but by a much slimmer margin than previously expected. If President Trump gets re-elected I’m not sure much will change as far as the markets go. The Democrats control the House and the Republicans control the Senate so gridlock could be a distinct possibility, similar to President Obama’s second term.

Scenario #2: Bernie Sanders wins the election

We obviously don’t know who the Democratic candidate will be but Bernie is putting in a strong showing early on in the primaries. If Bernie were to be elected the markets would probably initially convulse given some of his campaign platforms. Whether the convulsion occurs before or after the election depends on expectations. If the market expects Bernie to win it will react prior to the election. If a Bernie victory is an unexpected outcome, similar to 2016, then the market will likely react after the election. Healthcare companies will probably take a beating in a Bernie win scenario as they likely would in any scenario with a Democrat winning. I think the reaction to a Bernie victory would be the most extreme given how far left he purports and campaigns to be. Whether he actually ends up being that far left, I don’t know. Regardless, the initial reaction would likely be a sharp selloff.

Scenario #3 Bloomberg wins the election

I don’t know how likely it is that Bloomberg wins the Democratic nomination but if he did, I think he could have a good chance of defeating President Trump. Admittedly, I’m a white, upper middle class finance guy so I could be way off base here. Additionally, I don’t know what Democrat voter turnout would be in a Bloomberg versus Trump ticket. I think Bloomberg could garner a lot of the independent votes that a Bernie type candidate might not get. In a Bloomberg wins scenario, I’m not sure the market reacts much initially. I think it might take a wait and see approach. Most market participants would probably view Bloomberg, at least initially, as business and market friendly by virtue of his professional history. It would be interesting to see how he would lean as president.

Scenario #4 Another Democrat wins the election

I don’t know if any other candidates in the field currently would stand a chance against President Trump. Again, I’m not too deep in the weeds on any of this. I guess the market’s reaction would depend on which candidate wins. If Elizabeth Warren were to win, I think the market’s reaction would be negative. If Pete Buttigieg were to win, I think the reaction wouldn’t be as severe.

A few important things to remember.

  1. The markets will price in who they think will win. If that candidate wins, the post election reaction won’t be anything noteworthy.
  2. If a surprise were to occur, then look out. There could be a severe reaction like we saw in 2016 on election night when it became apparent Trump was going to win.
  3. Whoever wins, the market’s initial reaction isn’t likely going to last for long. Any changes and/or new legislation would have to work its way through Congress, which could take quite a long time or never make it out. So any fear or concerns about policy won’t materialize until the actual legislation is passed.
  4. Regardless of what happens, don’t let politics dictate your investing.

While presidents may like to think they have a meaningful impact on the market, I don’t believe there’s data, of any significance, to support such a claim. There will be a lot of noise and confusion this year as there are in any election year. Stay above the fray and stay focused on following your plan. That’s the surest approach to surviving another election season.