Contested Elections and the Stock Market

By Dean Barber

October 29, 2020

Contested Elections and the Stock Market

We’re coming up on elections; some of you may be reading this on election day. There is a global pandemic that we have rising cases going on right now, the election, and the economy. I know you have questions about how you should position yourself and what you should be doing. We’re going to discuss all of that and how contested elections have impacted the stock market in the past.

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The Election

So let’s address the 800-pound gorilla in the corner right away—the election. As I said in the intro, many of you will see this video on election day. We think that there is a good chance that we’ll have a contested race presidential election. 

We may not know who the new President of the United States is for a few days, maybe even a month. If we go back to the year 2000. With the hanging chads in Florida, it was December 12th, I believe, before we found out who the President was. 

I will discuss what the markets act like during that time of uncertainty because there’s anything that the markets hate, and it’s uncertainty. But before we get into that, I want to shed a little bit of light on a historical basis of what happens with a Republican president versus a Democrat president whether we have a unified Congress, a unified government, or a split Congress. 

Stock Market Performance Under Different Government Control Scenarios

Contested Elections Stock Market - S&P 500 Performance Under Diff Controls

Figure 1 | Source: State Street Global Advisors

Now, I’m going to start with the very best case scenario from the market perspective. Look at Figure 1; you can see that with a split Congress and a Democrat president, the average annual return in those years has been 13.6% on the S&P 500. 

When we have a unified Congress with a Democrat president, we have a 12.96% average return. A unified government and a Republican president equated to a 12.95% return. And the worst is a Republican president and a unified Congress, which is a 4.91% return on the S&P 500. 

As we look at this, we can’t say that who controls the White House, the House of Representatives, or the Senate, dictates the direction of the stock market? 

We’re in Control

The reality is that you and I dictate the direction of the economy, which dictates the market’s direction. What do I mean by that? The American consumer is responsible for 70% of every dollar spent in the United States, also known as the GDP. As the American consumer goes, so goes the economy, and the markets follow. 

The biggest threat facing us today, and I talked about this a little bit last month, is not a Biden victory, a Trump victory, or sweep of the House and Senate. Let’s set politics aside. The biggest threat that we have to our economy, businesses, and people’s livelihoods is COVID-19. 

Unless we have an effective treatment or a vaccine, the American consumer will not feel confident that they can get out and spend money and live the life they want to live. Therefore, consumer spending suffers. When consumer spending suffers, the economy suffers. And when the economy suffers, the market suffers. 

So the key for all of us to get back to a happier, healthier life with more clarity and vision of the future will rely on our medicine. That’s either an effective treatment of COVID-19 or a vaccine. So let’s all pray that that can happen soon. 

Contested Elections and the Stock Market

Now, let’s talk about what happens in contested elections with the stock market. I’m going to take you back to the 2000 election and talk about the contested election. 

Contested Elections Stock Market - Contested Elections

Figure 2 | Source: State Street Global Advisors

2000 Contested Election and Stock Market Performance

The election was held in 2000 on November 7th, as you can see here, and we’ve got a little bit of a busy chart, so let me explain to you what we’re looking at. 

The blue line is the S&P 500. The green line is the Russell 2000 index, which is your SmallCap index. And then you’ve got gold prices, as the gold line, and the orange line is what was happening with bonds.

You can see that we had the election on November 7th of 2000, and we didn’t know! It was a contested election! Who won? Who is our President? We didn’t discover that until the Supreme Court decision was issued on December 12th of 2000. 

The markets still were in a very volatile state, and they rebounded nicely. 

We had some drawdowns; the Russell 2000 was down by about 7%. The S&P 500 was down by 4.87%.

But there’s a difference in 2000 versus 2020. The big difference is that in 2000, we were one year into the most god awful bear market that lasted for three years. You remember the Dot Com Bubble burst in the early part of 2000? 

Was the Stock Market Volatility Because of the Contested Election?

The question is: Was the result that we saw here of what the markets did in that month after the election as a result of a contested election? Or is it just coincidence because that was the beginning of a protracted three-year bear market due to the tech bubble’s continued fallout? 

I don’t have an answer for you there. Because we really can’t say what caused it, we can’t say what causes daily market volatility. I can tell you that it’s critical that you have a strategy and have an allocation during this time. This is not a time to take on additional risk or more risk than what you need to accomplish your financial objectives. 

That’s why it’s critical that you have a comprehensive financial plan done and that your investments drive in the direction you want to go. You need to understand that there will be bumps in the road and that you need a strategy that will give you the best possible chance of meeting your overall objectives. 

With that in mind, make sure that you’re reviewing your portfolios with your advisor, making sure that you’re talking to them about your plan. We speak to you throughout the year. So hopefully, you’re going to say, “Yeah, Dean, we just talked to our advisor about this last week, or last month or last quarter.” 

However, my point is that you make sure that you understand that we want an open line of communications, and we want to be here to answer any questions that you have. 

Market Performance

With that, let’s go to what happened in the market here in the last month. Remember, I’m writing this it is October 28, 2020, so we’re going to miss a few days between this date and the time you view this video. 

Contested Elections Stock Market - Market Performance

Figure 3 | Source: Chaikin Analytics

Take a look at the one week in Figure 3, trailing here on October 28th. So the Russell 2000 is our best performing that’s the SmallCap sector, and it’s down only by 1.6%. The Dow Jones Industrial Average at that point is down 2.93% in the last week. Over the last month, the market’s best performing sector has been SmallCap at 5.6% in the previous four weeks. In the same timeframe, the Dow Jones Industrial Average is a negative 1.02%.

However, if we look at a year to date period, S&P 600 SmallCap negative 11.33%, and best performing is the NASDAQ 100 up 32.95%. Year to date, the Dow Jones Industrial Average is negative 3.66%, and the S&P 500 is just over 5%. 

I pointed this out to you guys previously; we have this wide divergence in the market returns. It’s not an all-encompassing market rally this year. We do have the Dow Jones Industrial Average on a year to date basis and negative territory. The S&P 500 was up a little bit last year, and the Dow did well last year. However, SmallCaps didn’t do very well last year, and it’s not doing very well this year. But in the previous month, it’s starting to pick up some steam. Maybe there’s some value the big institutional investors see. 

Stay in Touch with Your Financial Planner

One of the things is always for sure: we don’t know exactly which sector of the market will do the best. We have several tools we use to follow, and you know, try to follow those trends. The best plan, though, is to have a good strategic investment plan that can go through all kinds of market cycles and let you live the life you want and have some fun. 

God knows that COVID-19 has us all feeling a little bit panicked and a little bit restricted right now. The last thing we want to do is to have your investments having you feel restricted or uncertain. So keep that line of communication open with us. 

By the time you see this. We’re on election day or maybe a day after. Likely, we may not know who the President is for a few days. We will know if it’s a contested election and will watch what happens in the stock market. Expect a video from me as soon as we know who the next President is. We’ll lay out what it means for the economy and what we believe it means for our investment strategy for the next 12 to 18 months. 

Remember, if you’re not a client yet at Modern Wealth Management, we’re here to help. If you’d like to have a complimentary consultation, you can get that by filling out the form below, and we will get in touch with you. We have that conversation via Zoom meeting, telephone call, or we are welcoming in-office meetings. Thanks for taking the time to join. 

Dean Barber Founder & CEO

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.