The upcoming US election is a topic which is at the front of many of our recent investor review meetings here at Southern Wealth Associates, and as such we thought it would be worth writing about some of our thoughts. The big day is less than three weeks away and all eyes are looking at what might happen on 3rd November which will cap off a unique year.
Current polls and forecasts are pointing towards a win for Biden and the Democrats but given the surprise nature of Trump’s victory in 2016 over Hilary Clinton it is probably wise not to take anything for granted. Either way markets are likely to prefer an outright win for either party rather than a contested election which could bring some more uncertainty to an already uncertain world. Divided party control will make decisions on economic stimulus difficult and stimulus would usually provide a short term boost to markets.
It is worth mentioning that predicting the effects of elections or political events on stock markets is generally a bit naïve, and you only have to remind yourselves of what happened in the UK with the Brexit vote to clarify this point. In the immediate aftermath of the news that the UK was going to leave the EU there was a huge sell off in local markets, however, what followed shortly after was an excellent 6 months for UK shares fuelled by a weaker sterling. If you had exited the market directly after the referendum you would have categorically been worse off even if your reasoning had been perfectly logical. Although we would like to avoid making lavish predictions on market movements there are some points which are relevant to consider for investors.
Broadly it is assumed that if Trump stays it could almost be business as usual and in general terms he is assumed to be ‘pro business’ supported by his generous corporate tax cuts. On the other hand it would likely see a continuation or even an increase in trade conflict with most notably China. Biden would likely raise the corporate tax rate from the current 21% and he may look to target big tech (Apple, Amazon, Facebook etc) which on the face of it could provide some short term volatility. Stricter regulation for companies in Financial Services, Tech and Healthcare is also promised under the Democrats, which is something Trump has avoided. There is an argument that the issues surrounding trade will not go away but perhaps the stance will soften with Trump out of the picture which may benefit Asian or Chinese equities.
So where does this leave our investors at Southern Wealth Associates?
As is so often the case we believe it is best to not get too carried away by particular one off events and to take a balanced view. Drastic decisions driven by ego can be catastrophic for investors and our approach hasn’t let us down before. Recent research carried out by Vanguard has suggested that actually with either a Republican or Democratic President the returns on US shares are near enough exactly the same over the last 150 years. Individuals may fall victim to the ‘this time its different’ view and given the points I have already mentioned there is an argument that volatility may tick up this time but equally there is no need for significant portfolio restructuring. We have been tweaking our allocations for months to factor in the potential outcome from the election, and we believe global equity exposure is probably more important than ever.
When managing our clients investments we prefer to think in terms of economic and company fundamentals rather than one off events and this should be treated no differently. We have invested in assets which could benefit from either outcome and it is always better to take the longer term view.