YOUR PORTFOLIO AND THE COMING U.S. ELECTIONS
Many of our clients have asked me what impact the coming U.S. elections might have on financial markets, both before the vote, and after. If Trump wins will the markets go up or down? Can we expect more volatility? What, and this is the point, should we do to prepare?
The large U.S. investment firm T. Rowe Price has done some excellent research on this topic (saving me a lot of work!) and you can find their full report here:
I will summarize their main findings:
- In election years, the most important U.S. stock index, the S&P 500, rises somewhat less than in the average year regardless of which party wins. But the difference is pretty small: an 11% rise in election years compared to an 11.5% return in all years. Since elections are held early in November, the election year results cover the 10 months prior to and the two months following the election. A difference in average return of 0.5% is no reason to panic.
- The stock market is actually somewhat less volatile than average in the six months before and the one year after election years. Again, the effect is not great. While we may think that there is a lot of market activity driven by anxiety over the election outcomes, the data show otherwise.
- One of the interesting findings, and the only one that really shows a divergence from the norm, is the impact of an incumbent party losing the election. Returns are higher in the market both before and after an election loss by the party in power, and by a significant margin in the short run. Three months after the election there is a 4.9% positive change, and six months after, the impact grows to 5.6%; but by the time a year has passed that change shrinks to a mere 2.1%. This might give some comfort to those who are concerned about a victory by the Republicans in November.
As all our clients know, we are long-term investors, and we base our buy and sell decisions primarily on company performance. We buy excellent companies that have a history of making money. These are the kinds of companies that produce reliable returns regardless of which party might be in power. Of course, every now and then a particular policy decision can have a make-or-break impact on an industry: consider coal mining, for example, which has been essentially legislated into extinction. For this reason, we pay very close attention to the news to ensure that we are not blind-sided by important changes in the political and business environment that might affect our investments. Usually there is ample warning of significant threats, giving us lots of time to make changes if necessary.
The pervasive impact of social media has acted as a gigantic amplifier that makes every twist and turn in the electoral process seem of great importance. Back in the days when we got our news from newspapers printed on paper, editors were guided by the adage “If it bleeds, it leads.” In the current era, computer algorithms are fine-tuned to catch our attention and inflame our emotions, much more effectively than any ink-on-paper editor. Everything is designed to keep us glued to our screens. In reality, much of what we read will turn out to be transient, fleeting and ultimately of little importance. This is even more true in the pre-election frenzy that now surrounds us.
With the report of third quarter results by the Canadian banks last week, the current earnings cycle is over. We are pleased by the profits and forecasts we saw from almost all of our portfolio companies. We received ample confirmation of our decision to sell two long-term positions, TD Bank and BCE, both of which, although for different reasons, no longer meet our definition of excellent companies. As we move into the last third of the year, we will greet whatever election results the American populace delivers with equanimity, knowing that quality companies thrive over time, no matter who the President might be.
David Baskin
Chairman
Media Appearances
Barry Schwartz on BNN’s The Open: Not much room from banks to grow in Canada – August 12, 2024
Benjamin Klein on BNN’s The Close: We are zero weight telecoms – August 16, 2024
Barry Schwartz on BNN’s Morning Markets: National Bank is leader in cost controls – August 28, 2024
Interesting Reads
Why so many index fund investors underperform the index – The Wall Street Journal
Book Review: The Power of Thinking like a Poker Player – The New Yorker