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

24 hot stocks and funds for 2021

Many investors use the new year to review their portfolios, and in this free ebook, two dozen fund managers and product providers give their best ideas for 2021 - some stocks, some funds, some sectors.

10 key themes for 2021

A summary of 10 investing themes for 2021 including early-cycle opportunities, populism, digital transformation and supply chains, plus the outlook for equities, fixed interest and alternatives.

Seven steps to easier management of your estate

Don't make life difficult for the person trusted to manage your estate. Find the time to arrange your documents, contacts, online accounts and files in a convenient place, including giving them some cash.

Five reasons Australian small companies are compelling investments

Many investors focus primarily on the big listed companies but the smaller end in tech, mining and healthcare outperforms through innovation. Many Australian companies are world-leaders in their speciality.

Two courageous responses to the Retirement Income Review

The Retirement Income Review has received criticism for compromising future super balances and not supporting the SG increase. The same result as an increase could be achieved by changing two other policies.

Retirement changes everything: a post-retirement investing framework

Categorising post-retirement needs – living, lifestyle, legacy and contingency – creates a framework for retirees. Advisers can translate these needs into investment goals and portfolios.

Latest Updates

Alternative investments

What to do when your collectibles become collapsibles

Collectibles are everywhere, from old cars, to sneakers, to wine, to cards and anything old and prized. But even if a collectible once attracted thousands of followers, what happens when the fans lose interest?

Financial planning

Compound interest rewards patience in an impatient world

Let compounding do its work. It starts slowly. This is why many of those who start an investment programme (or fitness programme, dietary change, sport, or business) give up in the early stages.

Shares

How did you go? Australian and global stockmarket winners and losers

The Australian market overall finished flat for calendar 2020, but the pandemic delivered big wins and losses. The companies, sectors and companies you invested in delivered vastly different results.

Investment strategies

What is endowment-style investing and who should use it?

For investors who have the scale, long-term investment horizon and lack of liquidity requirements, it makes sense to implement an asset allocation that can take advantage of a lack of constraints.

Investment strategies

Five ways to build investment portfolios amid growing inequality

At the start of the 20th century, a 'Gilded Age' for plutocrats created vast fortunes and economic inequality surged. COVID is having the same impact now, but portfolios can be adapted to respond to the opportunities.

Investment strategies

The hazards of asset allocation in a late-stage major bubble

The Grantham article everyone is quoting, in full. "The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble ... this could very well be the most important event of your investing lives."

Investment strategies

Best and worst performing equity funds of 2020

Growth was the place to be through the pandemic while value managers couldn't catch a break. It's the long run that matters but 2020 delivered pleasure or pain for many managers.

Sponsors

Alliances

© 2021 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.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. 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.

Website Development by Master Publisher.