A Few Words About the 2020 Election

"Jay Franklin, CFA, CFP, FSA | Clarity Capital Advisors |

We are now seven weeks out from what has been repeatedly described as the most important election in modern history. The prediction markets (where participants have their own money at stake) assign Joe Biden a 53% probability of victory with President Trump at 47% (realclearpolitics.com). This essentially means that you may as well flip a coin. We do not place any confidence in polls due to rampant preference falsification and their failure to address the Electoral College system. Besides, the 2016 election should have eliminated all doubt regarding the credibility of polls, or lack thereof.

The odds for the Senate are nearly identical (54% Democrat/46% Republican), but the House has an 84% chance of remaining blue, and blue is definitely a good description of the mood of the electorate for reasons which are all too familiar.

So what should investors do in response to the election? Our answer is simple—nothing. When we examine stock market returns for the few months before and after presidential elections, no clear pattern emerges. In the 23 elections from 1928 to 2016, the average 3-month pre-election return was 1% higher when the winner was Republican, yet the average 3-month post-election return was 1% lower (credit to Avantis Investors for putting this data together). Neither of these results is statistically significant, meaning that they are likely attributable to randomness or noise.

Regarding the question of whether to invest more in an election year because the incumbents pull out all the stops to stimulate the economy, Vanguard analyzed the performance of a 60/40 portfolio over the past 150+ years (Vanguard Perspectives, 9/14/2020). They found that presidential election years showed a 0.8% higher return compared to nonelection years. Again, the result is statistically insignificant and is certainly not worth playing games with your portfolio.

In closing, we ask our readers to recall Sir John Templeton’s four most dangerous words of investing—this time is different. Also, as the author of the Vanguard article referenced above stated, “Elections hold great importance in upholding the American tradition of democratic, representative government. However, their impact on financial markets has historically proved to be negligible.”