How is the US Election Race Faring? Does it impact your portfolio? 

Summary

• The horse race for the White House has started between the Republican candidate, President Donald Trump and Democratic nominee, Joe Biden.
• The upcoming election is set to shake the stock markets and result in shifting of strategies by investors no matter who is the winner.
• Investors react to the events that affect the economy and corporate profits in the long term instead of establishing decisions on the winner of the election.
• Investors must put their emotions aside and not get bothered by the primary season’s uncertainty while making investment decisions.

The US Presidential election is just two months away from now and all eyes are set on its outcome, which will have an impact all around the world. Just as the race between the Democratic nominee, Joe Biden and Republican nominee, President Donald Trump started to gain momentum, the world was hit by coronavirus outbreak, which wreaked havoc to the election process in the US.

The impending election could bring turbulence in the markets regardless of who wins. Moreover, the market performance is impacted more by the events that affect the economy and corporate profits over the long-term period.

One of the best examples of this was the S&P 500 Index, which fell to the lowest level in last 10 years during March and April, when the nation along with the world was put under coronavirus induced lockdown, but the index has since bounced back, recovering all its losses.

The recovery occurred even when the number of coronavirus cases, as well as deaths were on the rise and when millions of Americans became unemployed.

Many investors believed that the prevailing recession would end soon, and companies will start posting profits in 2021, which resulted in the markets to recover.

Another reason that helped the markets to recover was the belief that the interest rates will be persistent in staying low, while the government will continue to spend trillions of dollars on economic stimulus programs until unemployment rates drop to manageable levels.

ALSO READ: A glimmer of hope in US economic recovery? Stock Markets indicate towards it

Investors might witness increased levels of volatility in the race to election day. Of late, it seems Democrat Joe Biden is leading the race, though, by a narrow percentage, over President Donald Trump.

Marko Kolanovic, JP Morgan head global quant stated that the market route would be propelled by coronavirus and the prospects of Trump being re-elected. He added that the effect of elections on sectors and factors could be tremendous and investment portfolios must adapt to possible re-election of Trump.

Investors are waiting for election results before adjusting the portfolio

The Presidential election cycle theory works on a basic idea that the stock market responds in a specific pattern contingent on the year of the President’s term. However, more recent presidential elections have failed to follow this arrangement. Forecasting the pattern of the markets can result in oversimplification, which can harm individual investors. No one can exactly predict the market cycle or if a particular party or candidate’s success will affect investments positively or negatively.

As per UBS’ election watch and investor survey, few wealthy investors are poised to make portfolio changes depending on the outcome of the election due on 3 November.

In late June and early July, the survey polled more than 4,000 wealthy investors and business owners throughout 14 markets worldwide. The survey revealed that optimism increased for the stock market and economy compared to the same period 3 months back due to easing effects of coronavirus.

GOOD READ: Implied Volatility- A Roadmap to Gauge Market Sentiment

Nearly 46% of the participants internationally ranked US election as their biggest concern, up from 39% in the earlier poll conducted, 3 months back. The report stated that a close fight in the US election could cause a high degree of market volatility.

Solita Marcelli, Chief Investment Officer Americas at UBS Global Wealth Management, stated that the US election is expected to give several opportunities to investors and some transparency in the policy direction as well in the country. The final effect on the financial markets is expected to be neutral regardless of the winner, even if they witness some short-term volatility.

Things investors can consider in an election year

A lot of investors are advised to stay on the path over the next few months who have time to recover from a major downturn. However, many investors remain worried about their portfolios and looking for methods to reduces their losses. Below are 3 points that can be considered:

1. Don’t fall into the analysis trap

Elections can lead one to think about several possibilities and raise questions on the following- if taxes will increase, how the result will affect investment, what is the market sentiment, etc. However, being too reactive and placing high importance to such risks can result in inaction and impulsive financial behaviours.

ALSO READ: 3 D’s of Investing in Bad Times – Demystify market Directives while Diversifying Your Portfolio

Elections have winners and losers but basing one’s decisions on the election results is a mistake as a range of other factors determine market returns and economic growth.

2. Focus on long term planning

One must be proactive in personal finances and not give the key to the financial future to a politician. Timing the market around politics and predicting a market behaviour can never be a successful long-term investment strategy and can result in a major hurdle for portfolio returns.

The right course of action is simply to be attached to a sensible long-term investment strategy focused on individual financial goals, whether it is through consistent investing at regular intervals or remain fully invested all over the year.

3. Don’t get scared by market volatility

Investors generally get scared of the uncertainty that comes with the election season, but it is often short-lived. There is a notion that new government policy will ruin a particular sector as the US policy plans, during primaries (election season to appoint delegates in the US), frequently aim for specific industries, which in turn puts the strain on the share prices.

However, this fear is usually exaggerated, as companies with good products that are really helping people will eventually be able to enter the market.