Disclaimer: this is a completely APOLITICAL analysis based solely on facts and my personal insight. This is not financial advice. This is for educational purposes only.
In this analysis, I’ll be discussing my own thoughts on the elections, the effect on the stock market, and what we can do as investors.
To begin with, my guess is that Trump’s chances of getting re-elected is higher due to a few reasons:
- Shy Trumpers: We have seen Clinton dominate the polls for the previous election, underestimating the number of conservatives who weren’t open about their political views - The Democratic Criteria: Traditionally, democratic candidates who won the elections qualified for either one of these: 1) Someone who had the presidential aura and vibe to begin with, absolutely dominating the campaign over his republican counterpart Ex) Franklin D. Roosevelt, JFK 2) Someone people never even imagined would be president Ex) Barack Obama
Biden is a political veteran, and someone who isn’t unexpected, as he’s the former vice president. Therefore, he doesn’t fit the conventional model of democratic candidates who have won the presidential elections.
However, there are always elements of surprise, and no one can really accurately predict the results.
The real surprise is that the result of the election does not have a direct impact on the stock market.
Generally, investors tend to be more conservative than liberal. This is due to the fact that republicans are generally more: - Business friendly - Pro Free Market - Less prone to regulations - In support of the wealthy class
The psychological aspect of these traders is also reflected in the market.
However, data suggests otherwise: Above in the chart, we can see the profitability comparisons of a case when a democrat is newly elected, in contrast to a case when a republican is re-elected. This is data from the S&P500 from 1924 to 2017.
Market participants believed that the economy and the stock market would underperform with a democrat as president, because liberals tend to focus on distribution of wealth more so than the accumulation of it.
However, in the inaugural year, the stock market demonstrates huge growth under the democrat president. This is because they start to realize that the distribution of wealth isn’t done as well as the president said it would be. In other words, people notice that having a democrat president isn’t necessarily bad for the economy.
In the same context, people have high hopes for a republican president to lead the economy upwards, but the republican president won’t do anything extraordinary compared to the democrat president. As such, the inaugural year returns are much lower.
Thus, considering everything, there isn’t much of a difference in the overall returns of a stock market under either a republic or democrat president. What matters more than the president’s political stance is market timing.
So what should we do as investors? Based on the data of the stock market, and the psychological insight we can get from how investors react, our plan as investors can be organized as follows:
1. If Trump Gets Re-elected The highest probable case for the stock market is that we see the market continue its uptrend for the short term. As I have previously mentioned in my other analysis, the current market is driven heavily by momentum, and Trump’s re-election will be identified as bullish news by investors. (Above is the analysis on the current Nasdaq’s uptrend) As such, in case Trump gets re-elected, it would be best to wait to see the market reach overbought territories for the short term, in order to cash out and wait for the next dip to buy in.
2. If Biden Gets Elected The highest probable case for the stock market when Biden gets elected, is to see a temporary dip in the market. As the market is driven by momentum, investors’ fear, doubt, and uncertainty will be reflected in the market, leading to a short term correction. However, as mentioned in my other analysis (chart above), the fundamentals of the companies sustaining indices such as the S&P500 or the Nasdaq index are solid. As such, over the long run, the news of Biden getting elected itself will not have any negative impacts on the stock market, and the correction will be a ‘buy the dip’ opportunity for the long term.
Conclusion In summary, no one can accurately predict future events, or the market’s price action or reaction to such events. What we can, and need to do, is be prepared for all probable cases of outcomes. Above, I have provided my own take on the current situation, and how I plan on preparing for the volatility to come. These are the steps you need to follow to do your own research and analysis:
1. Establish a hypothesis, and conduct research and look for data to back it up 2. Think of all probable cases 3. Weigh in probabilities to all those cases 4. Think of an investment plan to prepare for all probable cases 5. Test your hypothesis 6. Revise your decision and thought process, and analyze why you were (in)correct.
If you like this analysis, please make sure to like the post, and follow for more quality content! I would also appreciate it if you could leave a comment below with some original insight.
IMO if Biden wins and Dems get 4 seats in senate the markets will rise sharply based on anticipation of a (D) controlled Congress and Executive passing new bailout.
Michael_Wang_Official
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@DaddySawbucks, Definitely! There have been analyst reports regarding that situation as a probable case as well. Thanks for sharing your insight :)
RobBiddle
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I think no matter who wins there will be new stimulus passed, which will then cause an uptrend. How big of an uptrend and how long it will last is going to be dependent on the size and type of stimulus.
The asset bubble is ready to deflate so it will either continue doing so on a longer timeframe with another nice bear market rally, or if the stimulus is big enough the bubble will rapidly expand and we'll get a huge blow-off-top like the Dot Com bubble.
Michael_Wang_Official
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@RobBiddle, You have a great point. Not that I don't agree with you, but to play the devil's advocate, also take into consideration a case in which the premise is that the asset prices aren't in a bubble. Thanks for commenting!
RobBiddle
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@Michael_Wang_Official, That's definitely a possible scenario. If you factor in monetary expansion certainly prices aren't as extended as they initially look based on the absolute price/index values, but they are definitely still high by historic standards. Relative to M2 total market values are comparable to the point in Jul-Aug 99' right before the massive Oct 99 - Mar 00 blow-off top, at least when looking at IXIC, SPX isn't nearly as bad since this "recovery" has seen so much rotation into big tech.
I think the truth is a mixed bag, there are definitely a plethora of bubbles, but there are also plenty of beaten down undervalued stocks. Bubbles in massive market cap companies are skewing the index numbers to make the bubble seem more broad reaching.
FUNSB
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@RobBiddle,
"there are also plenty of beaten down undervalued stocks"
Did you mean now?
It' s hardly to find one. And W.B. would agree with me ;)
bkyleo17
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You should create a scenario for Biden to win and Trump refusing to leave the White House. Just as likely as
the other two outcomes.
Ibuyblocks
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@bkyleo17, this is not a possible scanario. This is fear mongering.
RobBiddle
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@Ibuyblocks, "Refusing to leave" I agree is basically impossible, but only once the results are final and can no longer be disputed.
The much more likely scenario is simply prolonged maneuvering and disputing. There are a lot of ways things can go badly, and IMHO a smooth orderly election with a clear victor is one of the least likely outcomes.