The 2020 U.S. election outcome carries market implications for health care, taxes, and other areas
Elections are good opportunities for long-term investors to conduct a portfolio review and assess goals
Investors can take a few basic steps to look past the election and make sure their portfolios are set up for the long haul
The votes are in, and the 2020 U.S. election appears to have been decided, but the longer-term election implications for the market remain to be seen. What do the election results mean for investors? Questions swirl around health care and the COVID-19 pandemic, infrastructure spending, monetary and fiscal policy, regulation, taxes, market volatility, and other critical areas.
Will President-elect Biden be “good” for the markets, “bad,” or somewhere in between? It’s much more complicated than that, so let’s set that debate aside.
“For long-term investors, the aftermath of U.S. elections can be a great time to take a step back for a portfolio review,” said Viraj Desai, senior manager, portfolio construction, TD Ameritrade Investment Management, LLC.
“Whenever we come out of a large event like an election and the dust starts to settle, long-term investors should consider a review of their goals and objectives,” Desai said. “Are you still on target toward your goals? Make sure you’re on track and make adjustments, if necessary. If you don’t have a plan, now is a good time to get one.”
Here are a few post-election considerations and questions for long-term investors.
What’s Ahead? More Volatility or Calmer Waters?
If the 2020 stock market could be defined in one word it’d be “volatility.” The markets were volatile and so was implied volatility, beginning with the first coronavirus outbreak through the final days of the election season.
U.S. stocks took a nosedive and volatility soared in the last week of October amid concern over surging COVID-19 cases. As the election dragged on, the Cboe Volatility Index (VIX) initially soared, spiking to four-month highs above 40 in late October but a far cry from the brief, 80-plus extremes in March as the escalating pandemic roiled markets.
But volatility began to ebb as certainty began to set in.
A disputed election, with the final results dragging out for weeks, naturally introduces more uncertainty for a longer time, potentially generating more market volatility. In 2000, for example, the Al Gore–George W. Bush battle took more than four weeks to be decided, and the S&P 500 Index (SPX) fell 5% between Election Day and the final results.
With the presidency essentially locked in, attention could turn to a couple too-close-to-call Senate races. With politics, it’s all about the balance of power.
Post-Election Past Is Prologue for Markets–Or Is It?
If you follow the markets, you’ve no doubt heard the standard disclaimer: Past performance does not guarantee future results.
So take this section with a grain of salt.
Post-election performance of benchmarks such as the SPX can offer perspective on what a Democrat or Republican-controlled White House and/or Congress could mean for the markets. Over the past three decades, the first year of a president’s term (including the year following re-election) often coincided with a strong performance by the broader U.S. stock market.
The S&P 500 posted a price gain of 19.4% in 2017, President Trump’s first year in office, according to Sam Stovall, chief investment strategist at CFRA. During President Obama’s first full calendar year in the White House (in 2009), the S&P 500 posted a 23.5% gain. In 2013, the first year of his second term, the S&P 500 gained 29.6%. In 1989—the first year for George H.W. Bush—the S&P 500 gained 27.3%.
But Congress controls the government’s purse strings, so the controlling party on Capitol Hill is another key factor. Historically, traditionally Republican-championed policies—like lower taxes and less regulation—were considered beneficial for stocks. However, the U.S. market’s strongest performances over the past 70 years have been turned in when the two major parties split power in Washington.
What About the Impact of More Pandemic-Related Stimulus?
With Republicans likely maintaining control of the Senate and Democrats retaining their grip on the House, the market—initially anyway—seems to be pricing in continued gridlock. However, there seems to be bipartisan consensus for another trillion-dollar stimulus package.
But it’s not clear who the targeted beneficiaries will be, nor the size or timing of a package. With that in mind, Desai pointed out two factors to consider. Answers hinge in part on the “checks and balances” that might influence any additional stimulus legislation in the coming months.
- Don’t Try to Time the Market
Timing any market around an election, or any other high-impact event, is complicated for investors to attempt. Just because we have more “certainty” on who will be leading us in Washington doesn’t mean you want to throw all your eggs in one basket. Think about the long-term goals you may have set well before the election.
“Make sure you’re diversified, and make sure you’re consistent with a long-term horizon extending many years,” Desai said. “Long-term investors who try to time market only add to their risks, and they could potentially derail their long-term strategy. It’s better to look past the here and now and continue to focus on diversification and maintaining a durable portfolio, with not too much focus on one country or stock and trying to prevent any permanent loss in capital.”
Ultimately, this is an exercise in not deviating from your objectives. It’s about time in the market, not timing the market.
Assess Your Appetite for Risk
The election was just one of several factors that made 2020 a particularly white-knuckle ride for investors. Now’s a good time to ask: Are you appropriately set up for your tolerance for risk?
“Investors who considered themselves aggressive may realize they don’t have the stomach for the volatility surrounding events like the U.S. election,” Desai said. “Maybe they’re better off with a more moderate risk, moderate growth strategy, and may want to consider adding some bonds to their portfolios.”
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Examine Your Potential Tax Implications
According to Desai, no matter who’s sitting behind the big desk in the Oval Office, or who bangs the gavel in Congress, there may be a tax impact for long-term investors.
On the campaign trail, President-elect Biden vowed to reverse the most recent tax changes. Plus, with several trillion dollars of new debt issuance due to the pandemic, the government may turn to the tax code to try to raise revenue.
In other words, taxes may be on the rise—for both individuals and corporations—which means it might be time to sit down with a tax advisor and discuss tax-deferred and tax-free investments. Are you familiar with municipal bonds? Do you know the difference between a traditional and a Roth IRA? Are you up to speed on contribution limits? If you own your own business, do you have your tax ducks in a row?
“Consider how higher taxes might affect you and how you can mitigate a potentially higher tax bill,” Desai said, “because some tax benefits from the tax cuts passed a few years ago might roll off. How might that affect your situation?”
One final reminder from Desai about the post-election period: Consider caution. Sure, markets advanced and volatility ebbed after the election. But we’re far from out of the woods. Any COVID-19 vaccine would take a while to work its way through the production and administration phases. Although the market has essentially recovered, the economy as a whole is still lagging. Unemployment remains historically high. And because markets have outpaced earnings, some valuations remain stretched. That can mean even more volatility ahead.
These are things to keep in mind during your post-election portfolio review.
Asset allocation and diversification do not eliminate the risk of experiencing investment losses.
*Advisory services are provided by TD Ameritrade Investment Management, LLC (“TD Ameritrade Investment Management”), a registered investment advisor. Brokerage services provided by TD Ameritrade, Inc. TD Ameritrade Investment Management provides discretionary advisory services for a fee. Risks applicable to any portfolio are those associated with its underlying securities. For more information, please see the Disclosure Brochure (Form ADV Part 2A).