Investors in major United States (US) stocks should not be spooked by the pending presidential election, with any significant stock market movements in response to the results being short term, according to a global investment manager.
Janus Henderson Investors director of research Matt Peron said while the 2020 election will take place as the direction of the COVID-19 pandemic and economic outlook remained uncertain, election-related pullbacks had more to do with fear than actual government policies.
“With the 2020 US presidential election fast approaching, markets are weighing the probability of a Democratic or Republican win and the resulting impact on stocks,” Peron said.
“Since 1960, the S&P 500 Index has enjoyed positive returns in the months leading up to a presidential election 80 per cent of the time and typically gone on to deliver gains in the 12 months following – with little differentiation between which party proves the victor.
“The COVID-19 pandemic has complicated matters for 2020, with US stocks cratering early in the year as the outbreak spread, then rebounding as central banks unleashed massive stimulus and economic lockdowns eased.
“With the pandemic’s trajectory still unknown, the election comes at a pivotal time, but the policies that result in the months and years following the vote may be less disruptive than feared.”
He said the restoration of economic growth is likely to be a priority for whomever won the election, but the two candidates, President Donald Trump and former vice-president Joe Biden, would take different approaches to reach that goal.
According to Peron, Trump would defer payroll taxes, lower the top capital gains tax rate and maintain the corporate tax rate at 21 per cent, while pursuing industry-friendly regulations for fossil fuels and banks.
Biden on the other hand will increase spending on infrastructure via a higher corporate tax rate of 28 per cent and increase tax on wealthy households, while investing in green energy and expanding government-run healthcare, he said.
Peron noted these proposals appear to favour certain sectors, which will do well depending on who wins the election, but over the long term the impact on markets will be more nuanced and depend on policy details.
“Nevertheless, markets fear the unknown and could become more unsettled as election day draws near. An unclear – or contested – outcome on November 3 could also roil stocks. But investors should bear in mind that these swings usually are short-lived,” he observed.
“This type of fear trade – one divorced from fundamentals – can create attractive opportunities to invest in companies with strong balance sheets and innovative products and services.
“Such firms could thrive long after an election is decided and potentially benefit investors who look past the volatility and stay focused on bottom-up analysis.”