It’s a tried-and-trusted truth that the markets don’t like uncertainty, which is why the confirmation that Joe Biden will be the next President of the United States brought relief to the stock markets last week.
But what does the election of a new President usually mean for asset prices, and how can investors benefit from the ups and protect themselves from the downs?
The US effect - what does an election do?
The first thing to note is that, if you’re looking at history, a Trump victory should have been better for US shares. Figures show that in election years when the incumbent President wins, US shares have risen 13.4 per cent on average, compared with 9.3 per cent when a new President is elected1. This is the principle of the ‘market liking certainty’ in practice - a whole set of new business policies can be unsettling.
The good news for investors - at least those with holdings in the US, is that election years are usually positive for the stock market, whoever wins. The Dimensional Funds report for 20192 suggests that markets ended election years in negative territory just four times in the last 23 election years since 1928, meaning they’ve been positive 19 times.
A 1968 theory, expounded by Yale Hirsch, then editor of the Stock Trader’s Almanac, suggests that the final two years of a President’s time in office are usually the best, because the President ‘pumps’ the economy in the hope of getting re-elected.
That might suggest that US fans may have to wait for the best from their investments after this election year.3
What about outside the US?
Of course, for most of us, the election of a US President is only a small part of the story for our investments. There’s the small matter of a coronavirus pandemic for the markets to contend with as well, and many of us hold more of our assets in the British and European markets anyway.
But global market sentiment is closely connected, which is why UK markets rose when Biden won, despite the fact that some commentators worry that his election could cause possible trouble for any post-Brexit negotiations4, which could, in turn, hit British stocks.
The case for diversity
Benefitting from any post-election bounce in the US, particularly when the UK could be adversely affected by US policies, is a matter of having a well-diversified portfolio in place. This should include stocks and bonds from companies in many different sectors, as well as in different areas of the globe.
Achieving this alone can be tricky, so you may want to talk to a qualified adviser who can ensure that your portfolio is matched to your risk appetite and is diversified to ensure you can access these benefits.
At uncertain times like these, expertise can really pay off, wherever in the world you are.