Election 2020: Uncertainty and the Markets
With early voting already underway around the country, you can probably guess the questions I’m hearing most often: “Who is going to win?” and “What does it mean for the market?”
I don't make political predictions but I do position portfolios to survive short-term uncertainty and perform over the long run, whatever the political landscape might look like. Elections bring enough uncertainty, even in normal times. But in the past, the uncertainty only revolved around who would win the election. For the first time in living memory, many Americans are uncertain about whether the election will produce an outcome that all candidates will accept. As polls showed the presidential race tightening throughout September, investor anxiety over a potentially disputed election increased, causing prices to fall. The S&P 500 fell by just over 4% in September. In October, with polls showing Biden's lead widening after the first debate, investor optimism for a decisive outcome on election day has risen, calming the markets. As of today, the S&P 500 is back within ~1% of all-time highs.
But October 2016 brought plenty of surprises, and the last few weeks have been full of them, too. I’d be surprised if we don’t see another bombshell or two between now and election day. I’m a “stocks for the long run” person, not in spite of uncertainty but because of it. No, we've never seen a year like this one. No, we've never seen an election like this one. But we have seen events that brought massive uncertainty to the forefront, and we can look back to see how investors and the markets responded. The stock market is like life: It’s made up of a series of seasons and cycles, all strung together, one after another.
We don’t need to be fortune tellers to be good investors. But we do need to believe in resiliency. And in this case, it helps if you believe that our political and economic institutions can withstand the pressures they are currently facing. That said, with all of the stress people have experienced this year from the pandemic, politics and the markets, I certainly understand if anyone wants to take financial uncertainty out of the equation for the time being by selling some stocks. But if you’re thinking about getting out of stocks until after the election blows over, please have a plan to get back in, regardless of who wins. Investing is made easier by focusing on the long-term. What will things be like in 2025 and beyond? The digital transformation of the economy seems to be a ruthless killer of companies that can't adapt, and I think we're only in the first stages of the trend. Great companies continue to grow and thrive, even in the face of short-term uncertainty, because they are able to take advantage of it. Investors can do the same, but only with a long-term perspective. If we learned a lesson in 2020, it’s that markets move fast, perhaps faster than they ever have in the past.
Excellent companies don’t trade at excellent prices for very long these days. Sometime between now and December you might get a few days or weeks to buy at very cheap prices. But if you're looking for a good opportunity to buy, please know the window may not be open very long. When the market collapsed back in March, investors barely got a chance to catch their breath before stocks shot up again. The market may respond more favorably to one candidate than the other when all is said and done, but I believe the market mainly just wants a decisive result. Who wins is less important than having a clear winner. Above all else, please remember that if you make investing decisions based on short-term uncertainty, you must be ready for a variety of outcomes in the short-term. If you buy after a brief dip, the markets may keep dropping for a while. If you sell now in the hopes of buying a dip later, the markets may not dip. But if you invest in good companies that you believe will thrive over the next 5-10 years or beyond, you will position yourself to mitigate risk and benefit from the long-term gains of compounding. Like many of you, I'm ready to move on from 2020 and get to what comes next. Hopefully, we'll have some clarity by this time next month as to what 2021 might have in store. In the meantime, be well, stay safe, and make plans to vote if you haven't already!