Will the 2020 Election Crash the Stock Market?

Please forgive the alarmist title. But it's for good reason. I'm getting questions from clients, family, and friends about how US presidential elections affect stock market performance. More specifically, they are wondering: How will the 2020 election affect the stock market? Which political party is best for stocks? Should I sell my stocks before the election, after the election, or neither? Will this election create a buying opportunity? 

I'll address each question with the response I generally give to my clients:

How Will the 2020 Election Affect the Stock Market?

The short answer to question of how the 2020 election will affect the stock market is that no one knows. However, there are some current clues and some history to formulate a few potential outcomes.

Here are various political outcomes, along with potential stock market performance following the election:

• No change in political power = no big move either way: If Trump is re-elected, and if the political makeup in Congress stays the same (Democratic majority in the House of Representatives and Republican majority in the Senate), stock prices would not likely rise or fall dramatically. This is because the investor herd prefers what it knows, as opposed to an unknown.
• Same White House, different Congress = no big move either way: If Trump is re-elected but the Dems win the majority in the Senate, while maintaining majority in the House, the stock market would not likely rise or fall dramatically. This is because investors prefer a predictable deadlock over an unpredictable single party in control. With that said, the fear of another impeachment could grow if the Dems choose to go that way again, which would introduce more uncertainty and place downside pressure on stock prices. 
• Dems win big = mostly positive with mixed results: As I type this, the market appears to be focusing more on monetary and fiscal stimulus than on political parties. If Dems win big, the fear of a drawn out, contested election fades quickly and the hopes of more fiscal stimulus returns. Looking forward, the investor herd could also could get cozy to the idea of loosening trade tensions with China, which was a big drag on markets in 2019. With that said, stock prices could be volatile following a Dem sweep. But short-term corrections could buying opportunities. This is because more stimulus, a vaccine, and improved China relations could give stocks more room to run over the next few quarters. Big caveat: 2022 could turn negative again when investors worry about the undoing of the 2018 Trump tax cuts.
• Close and contested election = worst case scenario for stocks: If the presidential election is so close that it appears impossible to know the winner for weeks, the market could react negatively in a big way. This is because, based upon current political rhetoric, it appears as if the results of the 2020 presidential could be contested by either side. This would be the worst case scenario for the stock market because of the uncertainty it creates (not because of political reasons). For reference, stocks fell 5% in the week following the Bush-Gore election in 2000, reaching a total of a 12% drop through December. Remember the hanging chads? In 2020, things could potentially get uglier. 

Should I Sell My Stocks Before or After the Election?

For decades, I've heard the question about selling stocks before an election and I've also heard the question about the idea of selling after an election. My response is always the same: Generally speaking, there is no good reason to abandon your investment strategies for fear of a short-term event.

If you will lose sleep at night for fear of an election result, one exception could be to get more defensive and diversify your portfolio. You may also want to have some cash on the sidelines to buy on post-election dips. But completely selling out of stocks before or after an election is potentially the worst decision an investor can make.

Which Political Party Is Best for Stocks and the Economy?

The short answer is that neither party is clearly "best" for the stock market. Based upon average rates of return for a 4-year term, stock market performance by political party is a statistical tie. Republican presidencies have averaged 8.8% annualized return while Democrats have averaged 8.6%. What's more important to know is that the market does not generally "care" about political parties; the investor herd cares about predictability, fundamentals, and if the Federal Reserve and Congress are actively stimulating the economy or not. 

In different words, the investor herd does not love or fear any political party; investors fear uncertainty, surprises, and economic weakness with no prospects of further economic stimulus. 

Bottom Line

I had a few clients wanting to pull their money out of the market when Obama was elected in 2008 and when he was reelected in 2012. That was the wrong decision on both occasions. I had a few clients wanting to pull their money out of the market when Trump was elected. That would have been the wrong decision. I have a few clients worried about both Trump and Biden now. While the fears are understandable, they're still wrong as it relates to long-term investment decisions.

I like the old buy-and-hold mantra: "Time in the market beats timing the market." Also, it's foolish to bet on the economy and markets based solely upon political party. It's much more important to focus on the economy, corporate earnings, geo-political conditions, and monetary and fiscal stimulus, rather than who sits in the White House.

To close, I'll borrow a few lines from an article I wrote back in July, Rational Investing in an Irrational Market: 

For a long-term investor, it's wise to stay invested through all market environments. Remember that 80-90% of gains for stocks occur on less than 10% of trading days. You can't afford to be completely on the sidelines during these days. 

As always, remember to remain focused on the things in life that are more important than money, which is just about everything.

Kent Thune is a philosopher who happens to be a money manager and a Certified Financial Planner (TM). Serving clients all around the U.S., Kent is owner of Atlantic Capital Investments, LLC, a registered investment advisory firm located in Hilton Head Island, SC. Kent is also a freelance writer published on multiple investing and finance websites, including MarketWatch, Yahoo Finance, Kiplinger.com, InvestorPlace.com, The Balance, and The Motley Fool.