Should advisors be making portfolio bets ahead of Biden-Trump rematch?

Should financial advisors change their clients' portfolio allocations in response to the upcoming presidential election?

In case you missed it (or have been living on another planet), there will be a presidential election on November 5 pitting President Joe Biden against former President Donald Trump. And, of course, the result of that election will have a significant impact on the economy and ultimately the stock market, owing to the policies enacted by the winner.

Until that winner is revealed, however, the market – and its participants – need to wrestle with the uncertainty of this very tight race. And as the saying goes, “The market hates uncertainty.”

Or does it?  

Jeffrey A. Hirsch, CEO of Hirsch Holdings and editor in chief of the Stock Trader’s Almanac, says election years have been the second-best year of the four-year cycle since 1901, with the Dow Jones Industrial Average averaging 7.6 percent gains in election years, putting them behind pre-election years, which average 12.3 percent. When a sitting president is running for reelection, the S&P 500 has averaged a gain of 12.8 percent in election years since 1949. This is substantially better than when there is an open field with no sitting president running, which culminates in a loss of 1.5 percent on average for he year.

“With a sitting president running, there is a good chance market, economic and civic conditions will likely remain unchanged, whereas with an open field there are a great deal of unknowns,” Hirsch said. “2024 has that power of incumbency going for it.

“Even if the market does take a breather, all these bullish election year forces remain in play for the rest of the year,” he added.

And what about the rest of the names on the ballot, those running for Congress, for example, and their impact on stocks?

Brad Neuman, director of market strategy at Alger, says that no matter which way the presidency goes, the probability of a split government remains high, which is historically a positive outcome for stocks.

“What we found is that it doesn't really make sense to align your portfolio broadly with one-to-one party and policies,” Neuman said. “We find it's better to focus on innovation and fundamentals, and that's what we're going to do.” 

ADVISORS CAST THEIR VOTES

Jason Rericha, managing director and co-founder at YellowWood Wealth Solutions, says presidential election years typically provide plenty of volatility that short-term traders can take advantage of, but that long-term investors should ignore the headline risks and continue to focus on the fundamentals of strategic investing that have proven to be successful through decades of different administrations.

“When Trump got elected, the world was going to end, and when Biden got elected, the market was going to crash. Almost eight years later, the world is still standing and the markets are near all-time highs. Our investment decisions remain rooted in long-term investment fundamentals, ignoring the headline risks and volatility of election years,” Rericha said. 

Chuck Etzweiler, senior vice president of research at Nepsis, is also not making any rash moves in client portfolios despite the hyperbolic election headlines.

Pointing to recent data released by the Capital Group, Etzweiler says investors make three fatal mistakes when investing in election years. First, they fail to realize that although stock prices can be volatile during primary season, they tend to bounce back following the results of a given election and are actually higher over the following year when compared to non-election years. 

The second mistake he sees is that investors tend to move assets into cash vehicles, with net asset flows into money markets twice as high as in non-election years. 

Lastly, Etzweiler says investors tend to stay on the sidelines too long and miss out on rebounds that normally occur.

“As a matter of fact, of the last 20 election years, only the years 2000 and 2008 produced negative years, and those were attributable to asset bubbles rather than politics,” he said. “If we see a pullback this election season and the fundamentals of a given company has not changed, we will likely be buying more shares of a great business that happens to be on sale.”

Rusty Vanneman, chief investment officer at Orion Wealth Management, believes that while the election will bring some short-term volatility, Wall Street and markets will perform well under either party. As a result, he expects the long-term impact of the election to be minimal.

“With all three branches of government razor-thin entering November, we believe a divided government is the most likely outcome,” Vanneman said. “Divided governments tend to offer the best returns as there is a lower chance of major legislation passing. Advisors and investors should tune out the noise this election season will bring.”