Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 382

Capital Group: What the U.S. election means for investors

Key takeaways

  • Investors should prepare for higher market volatility in the aftermath of Election Day.
  • Patience is key as the outcome of the U.S. presidential race may not be known for days or weeks.
  • Republicans will likely hold the Senate, resulting in a split Congress, an outcome that has historically resulted in higher market returns.
  • Despite the uncertainty, investors should remember that company earnings, not elections, drive the stock market.

The uncertainty of 2020 continues.

After turning out in record numbers on Election Day, U.S. voters have yet to see a winner declared in the U.S. presidential election. In a race that has proved to be much closer than many polls had predicted, the final outcome may remain unknown for days or even weeks.

“Patience will be the key to getting through this period of political uncertainty,” says John Emerson, Vice Chairman of Capital Group International and a former U.S. Ambassador to Germany. “There are literally millions of votes that have yet to be counted — including a large number of mail-in ballots — so a delay is not that surprising. We’ve been warning about this scenario months.”

From an investment perspective, it is likely that market volatility will persist at elevated levels until President Donald Trump or former Vice President Joe Biden is declared the winner. U.S. equity markets staged a strong rally on Election Day, with the S&P 500 Index rising 1.8%. Treasuries rallied, partially on the view that a split government could curtail prospects for excessive fiscal stimulus.

“There’s understandably a lot of anxiety right now,” Emerson adds, “But investors should think hard about adhering to their long-term investment goals, rather than reacting to near-term political events. That is often a mistake.”

Over the course of history, markets have powered through contested presidential elections, deadly pandemics and economic recessions — usually not all in the same year — but they have powered through, nonetheless. Whether a Democrat or a Republican occupies the White House has made little difference to overall long term investment returns.

Where do we go from here?

The stage has been set for vote-counting battles, and a flurry of lawsuits, in swing states that have not yet been called for Biden or Trump. Those states include Pennsylvania, Nevada, North Carolina and Georgia, according to The Associated Press.

“Thursday or Friday is probably the earliest we will know the preliminary vote results for each state, depending on the looming litigation,” says Matt Miller, a political economist and policy analyst with Capital Group. “The presidency could go either way in the fraught period ahead.”

The nation essentially remains just as divided as it was four years ago when Trump unexpectedly won the 2016 election. Miller notes, “Whoever wins this election will have the daunting task of trying to bring unity and healing to a nation that is split right down the middle.”

In other races, it appears that Republicans will continue to hold a majority in the U.S. Senate, Miller says, while Democrats will maintain control of the House of Representatives, resulting in a split Congress. That’s been the case since the 2018 midterm elections when Republicans lost the House. Coincidentally, according to our analysis, markets have performed best under a split Congress.

Two key issues in the race

The U.S. economy and the coronavirus outbreak were the top two issues in the presidential contest, according to most polls. Trump was generally viewed unfavorably for his handling of the pandemic, while voters gave him higher marks for his economic policies. The U.S. fell into a recession earlier this year, as government-imposed lockdowns brought economic activity to a near standstill.

However, in the most recent measure of U.S. economic activity — released just five days before the election — U.S. GDP growth bounced back sharply, rising at a 33.1% annual rate, benefiting from pent-up consumer demand and massive government stimulus measures. A key driver has been U.S. home sales, which have benefited from rising demand and historically low mortgage rates.

Despite extreme volatility during the year, U.S. equity markets also have trended upward. On a year-to-date basis to October 30th, the S&P 500 Index gained 2.8% as technology and consumer-tech stocks rallied amid the lockdowns.

“The near-term performance of the economy and the markets may have played a role in this election but, realistically speaking, presidents get far too much credit when things go right and far too much blame when things go wrong,” says Capital Group economist Darrell Spence. “For the most part, the dynamics that contribute to economic growth and market returns are put in place long before the election and they remain long afterward.”

“As investors, we try to focus on the underlying fundamentals that are driving the economy and corporate profitability,” Spence notes. “That often has very little to do with who happens to win an election.”

 

John Emerson is Vice Chairman, Capital Group International. Matt Miller is a political economist and Darrell Spence is an economist and research director at Capital Group, a sponsor of Firstlinks.

For more articles and papers from Capital Group, click here.

 

RELATED ARTICLES

MFS Investments: Blue wave fails to reach shore

Perpetual: Biden impact not as important as China for Australia

The 2020 US presidential elections

banner

Most viewed in recent weeks

2024/25 super thresholds – key changes and implications

The ATO has released all the superannuation rates and thresholds that will apply from 1 July 2024. Here's what’s changing and what’s not, and some key considerations and opportunities in the lead up to 30 June and beyond.

The greatest investor you’ve never heard of

Jim Simons has achieved breathtaking returns of 62% p.a. over 33 years, a track record like no other, yet he remains little known to the public. Here’s how he’s done it, and the lessons that can be applied to our own investing.

Five months on from cancer diagnosis

Life has radically shifted with my brain cancer, and I don’t know if it will ever be the same again. After decades of writing and a dozen years with Firstlinks, I still want to contribute, but exactly how and when I do that is unclear.

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

Welcome to Firstlinks Edition 552 with weekend update

Being rich is having a high-paying job and accumulating fancy houses and cars, while being wealthy is owning assets that provide passive income, as well as freedom and flexibility. Knowing the difference can reframe your life.

  • 21 March 2024

Why LICs may be close to bottoming

Investor disgust, consolidation, de-listings, price discounts, activist investors entering - it’s what typically happens at business cycle troughs, and it’s happening to LICs now. That may present a potential opportunity.

Latest Updates

Shares

20 US stocks to buy and hold forever

Recently, I compiled a list of ASX stocks that you could buy and hold forever. Here’s a follow-up list of US stocks that you could own indefinitely, including well-known names like Microsoft, as well as lesser-known gems.

The public servants demanding $3m super tax exemption

The $3 million super tax will capture retired, and soon to retire, public servants and politicians who are members of defined benefit superannuation schemes. Lobbying efforts for exemptions to the tax are intensifying.

Property

Baby Boomer housing needs

Baby boomers will account for a third of population growth between 2024 and 2029, making this generation the biggest age-related growth sector over this period. They will shape the housing market with their unique preferences.

SMSF strategies

Meg on SMSFs: When the first member of a couple dies

The surviving spouse has a lot to think about when a member of an SMSF dies. While it pays to understand the options quickly, often they’re best served by moving a little more slowly before making final decisions.

Shares

Small caps are compelling but not for the reasons you might think...

Your author prematurely advocated investing in small caps almost 12 months ago. Since then, the investment landscape has changed, and there are even more reasons to believe small caps are likely to outperform going forward.

Taxation

The mixed fortunes of tax reform in Australia, part 2

Since Federation, reforms to our tax system have proven difficult. Yet they're too important to leave in the too-hard basket, and here's a look at the key ingredients that make a tax reform exercise work, or not.

Investment strategies

8 ways that AI will impact how we invest

AI is affecting ever expanding fields of human activity, and the way we invest is no exception. Here's how investors, advisors and investment managers can better prepare to manage the opportunities and risks that come with AI.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.