How to Prepare for an Election Night 'Shock'

'That map was getting red as hell'... Remembering Election Night 2016... Stocks tend to predict the election, not the other way around... Will the 'return to normalcy' candidate win again?... The ultimate answer...

Nearly four years ago, Donald Trump was surprised he won...

A lot of people either forget or don't like to remember this fact, but even Trump didn't think he was going to defeat Hillary Clinton to win the presidency in November 2016.

That's what Trump told a crowd in Wisconsin about a month after he was announced the stunning winner of the election...

The story starts around 5 p.m. on Election Day 2016, when Trump said his daughter Ivanka called him on the phone and said, "Dad, it looks really bad," referring to the exit polls.

For the next several hours, Trump himself believed what he later called the "phony" polls. He accepted the idea that he wouldn't be in the White House... and seemed content to keep his home office in Trump Tower instead.

As Trump said to the group of supporters in Wisconsin in December 2016, while standing on stage near Vice President-elect Mike Pence...

I sort of thought I lost, and I was OK with that. I wouldn't say great. In fact, I called my vice president and I said, 'It's not looking good.' Right, Mike [Pence]? I said not looking good...

So now the polls just closed, and they start announcing numbers. And I say, 'Oh, this is gonna be embarrassing.' I'm trying to figure out what am I gonna do. And I have this ballroom that's not that big because I didn't know if I was gonna win or lose.

Then it happened, folks, out of nowhere. Boy, that map was getting red as hell. That map – that map was bleeding red. ... That map was so beautiful looking.

The point is, elections can be near impossible to predict... even if you're one of the two big candidates and it's a few hours before the results become known.

And even if you're right about one thing – like who wins – you can be wrong about another... like which way the stock market goes after the results come in. Or vice versa.

This may sound confusing, but in today's Digest, we'll explain...

Remember, stock market futures plummeted on the night of the election in 2016...

As the map started "getting red as hell," as Trump put it, and he started winning key battleground states, futures traders turned massively bearish...

At one point in the overnight of Tuesday, November 8, 2016, futures on the benchmark S&P 500 Index had fallen 5%, triggering Wall Street's "circuit breaker" system... And the CBOE Volatility Index ("VIX") futures spiked 40%.

I remember waking up the next morning to a text message from a friend who I didn't know was even interested in stocks... He pointed out what was happening with the S&P 500 futures. And as Porter wrote in the Digest the next day...

Some people are happy. Some people are acting like someone shot their dog.

For the "someone shot their dog" group, this turned into another "shoeshine boy" moment, except it was indicative of a bottom defined by massive fear, not a top signaling euphoria.

Gradually, the fear subsided for investors in stocks, at least. The bull market went on...

From the day after Trump was declared the winner in November 2016 through the pre-pandemic highs this February, the S&P 500 was up 58%, and the tech-heavy Nasdaq Composite Index was up 89%.

A lot of that got wiped out in a matter of weeks, of course. But you still won't hear many investors who turned bearish in the middle of that November 2016 night talk about how those bets turned out.

In this pandemic era, it's once again safe to say that it's 'unclear' what will happen with the election this November...

Because of social distancing, we're not even seeing in-person campaign rallies that could be used to gauge any kind of support for one candidate or the other.

And the polls, well... we've always been skeptical of the polls. After all, no pollster has ever asked us our opinion.

But we will at least note that today, most of these polls show a narrowing lead for Joe Biden. And one notable poll from Rasmussen showed Trump ahead for the first time all year just last week.

We sense that the race is closer than many people might imagine.

And what's more, no matter who you support, we might not know conclusive results for days or weeks after Election Day... And the longer that goes on, the more volatility we can expect.

In fact, as Senior Analyst Matt Weinschenk mentioned in Monday's Digest, many investors are preparing for volatility over the next two months, as shown by bets in the options markets of stocks, foreign currencies, interest rates, and credit.

And already today, we're seeing a concerning dynamic that we haven't seen since the dot-com bubble at the turn of the century... The VIX is at the highest point it's ever been while stocks are making new highs.

As we said Monday, it's time to prepare for what's coming next if you haven't already.

But how do we prepare for 'what we don't know?'

We don't know who will win, as much as we don't know what the temperature will be in Baltimore on the morning after Election Day.

But in today's Digest, I (Corey McLaughlin) want to share a few lessons from our not-so-distant past and those from further back in history... and let you draw your own conclusions. And of course, we'd love to hear your thoughts at feedback@stansberryresearch.com.

Let's begin with what we do know...

Longtime readers know that our founder Porter Stansberry has pointed to 2020 as a critical year for the country. He has long believed that this year would likely usher in a new wave of socialist policies to "fix" our deep-rooted economic problems.

As Porter also wrote in the Digest the day after Trump won in 2016...

Virtually everyone believes that government spending and/or tax cuts will have a powerfully positive effect on our economy.

The Republicans believe tax cuts and military spending are the basic formula for economic prosperity. The people cheering today believe that Trump's wall (his announced infrastructure spending), his tax cuts, and his estimated $6 trillion budget deficit over four years will create winners in the stock market and wealth for our nation.

In some limited ways, that will prove to be true. The Pentagon, for example, is the world's largest consumer. It buys more oil than any other entity. And if Trump builds a wall across our southern border, he's going to buy a lot of steel.

But in other, far more important ways, the idea that government spending and government debt is a positive force in the economy is completely wrong. Fatally wrong.

We've seen the story before. The economic part of it – national debt grows and eventually the poor threaten revolt – is as old as the Bible itself, as Porter wrote in the second chapter of his book, The Battle for America. As I wrote in the June 3 Digest...

Now, Porter couldn't have imagined largely disorganized and massive "stay at home" orders and an expensive economic shutdown in response to a dangerous pandemic as the catalysts today...

But much like the coronavirus outbreak has accelerated trends that were already in place, it has also exposed existing problems and an underlying movement that has been happening for years...

The almost instantaneous approval of $1,200 in checks and debit cards being mailed to folks earlier this year showed just how reckless politicians have become. And that's just since the financial crisis only a decade ago, when the idea of such direct payments was quickly dismissed.

The Federal Reserve inflated its balance sheet to help "pay" for unprecedented amounts of stimulus. We're seeing social unrest in the streets. And populism arrived right on schedule, after a stretch of 30 or 40 years, just as Porter predicted in his book.

And yet, we're still at the start of this battle...

As we pointed out last week, the calls for fiscal stimulus from both sides of the political aisle continue – if they could only agree on a number – and the Fed's massive lending programs have still been largely untapped.

Our debt will grow, the U.S. dollar will be devalued, and our economic system will be redefined no matter who wins. It's only a matter of how much, how soon, and by what pieces of legislation.

We also know that, historically – as in European and American history dating back five centuries – we are squarely in a period of "chaos." (In case that wasn't clear already.)

I wrote about this in the July 29 Digest, noting the clear signs that we're near the end of an 80- to 90-year generational cycle – a "saeculum" – that is marked by a period of a "high"... followed by an awakening, unraveling, and crisis.

These cycles have played out in Europe since the 15th century and for all of American history, and the term dates back to ancient Italy.

Demographer Neil Howe and the late author William Strauss made this "Fourth Turning" theory famous decades ago. And recently and notably, if you're a believer in the theory, Howe said we shouldn't expect a "resolution" of this era of crisis until the year 2026.

That's six years from now... after the next election will happen.

We also know that in the really long run, election results don't matter to stock prices...

Or at least there's no clear-cut evidence to say that "If a Democrat wins, this happens," or, "If a Republican wins, this happens."

In the last 100 years, stocks have tended to go up over time no matter who has been in the White House. You can see what we mean in the following chart...

Similarly, there's no clear trend for stocks based on the makeup of Congress either, whether Democrats or Republicans control the House and Senate, or if there's a split in party control.

Here, the longer-term direction is also up...

If anything, stocks tend to predict the election, not the other way around...

It's easy to get "lost in the weeds" of pre- and post-Election Day statistics as they relate to the stock market...

And if you're a long-term investor with a properly allocated portfolio, looking at them is probably nothing more than a good way to waste your time. You could instead spend that hour hanging out with the likable members of your family.

But if you're making short-term trades or have a shorter time horizon on some investments, the numbers and stats around turning points can be critical.

So with that in mind, here are a few important historical trends that might be helpful to any kind of investor...

First, if the stock market has been up in the three months leading up to the election, it's been a smart bet to put money on the incumbent.

Over the last four decades, the S&P 500's performance in the three months prior to Election Day has accurately predicted who wins in November every time. And since 1928, this indicator has been accurate more than 85% of the time.

As Kiplinger magazine put it an article four years ago...

The statistics are compelling. In the 22 president elections since 1928, 14 were preceded by gains in the three months prior. In 12 of those 14 instances, the incumbent (or the incumbent party) won the White House.

In seven of eight elections preceded by three months of stock market losses, incumbents were sent packing. Exceptions to this correlation occurred in 1956, 1968 and 1980.

Second, history also favors an incumbent winning – except if a recession has happened during his term.

Since 1932, an incumbent president has never failed to win re-election unless a recession has occurred during his time in office. As you know, that's what we've got this year.

Of course, none of this history applies to the middle of a pandemic...

For a useful comparison to today's world, we should look at the last once-in-a-century pandemic...

For that, we must go back to the period of the Spanish Flu of 1918. It arrived in earnest in the U.S. that March (sounds familiar) and kept killing large numbers of people into 1919 before dying out in 1920 without a vaccine.

Republican Warren Harding, running on a platform of a "return to normalcy" following World War I and the pandemic, won the 1920 election and took over for the two-term Democrat President Woodrow Wilson.

Harding started a three-president run of Republicans that lasted through the Great Depression. (Calvin Coolidge, Harding's vice president, took over in August 1923 after Harding died... Then, Herbert Hoover won election in 1928.)

As Enrique Abeyta of our corporate affiliate Empire Financial Research showed earlier this year in the Digest, during the last post-pandemic era, the Dow Jones Industrial Average traded sideways until 1924, before taking off and popping violently in 1929...

As Enrique wrote...

This could be a reasonable road map for the period we are in right now: Slower recovery in the real world, but the injection of liquidity "supercharges" asset prices.

That statement, made back in May, was certainly spot-on.

We may not feel great that stocks took off from March's bottom primarily thanks to the Fed's easy-money policies, or about knowing what ultimately comes with massive government debts. But nevertheless, it's what our editors and colleagues have to work with today when researching and recommending stocks in our full collection of services for you.

It's another "known" that we have to consider heading into this November.

The ultimate answer to all of this is 'diversification'...

It's not sexy, nor will it grab headlines in the mainstream media like Supreme Court nomination debates, but it works.

Our colleague Dan Ferris has hammered home this point in the Digest over the past few months... Properly diversifying your portfolio is the only way to protect it from uncertainty. As Dan wrote in the August 21 Digest...

Too many investors don't understand the point of holding a diversified portfolio.

You don't hold a well-chosen, balanced portfolio of assets because you believe they're all going to rise in value every week through eternity.

You hold a diversified portfolio because government spending, borrowing, and printing of trillions of dollars creates too much risk of monetary mayhem.

You diversify precisely because you know some assets tend to perform well under certain conditions... while other assets tend to perform well under other conditions.

Taking it one step further... You diversify with high-quality, dividend-paying "forever" stocks that will compound your wealth and perform well regardless of a recession, as well as "hard assets" like gold that will protect the value of your nest-egg as inflation takes off.

When you properly allocate, you don't even have to be right about who wins the election, if it's going to be "shocking," or anything else. Your allocation will be right for you.

To that point, this is precisely what our friend and Empire Financial Research founder Whitney Tilson plans to talk about in his special 2020 Election event that goes live at 8 p.m. Eastern time tonight.

Whitney has picked eight stocks that he believes investors should own heading into November. And tonight, you'll hear him urge you to buy each of them during a fascinating discussion about the election with his colleagues Enrique and Berna Barshay.

The FREE event goes live in just about two hours... And for everyone who tunes in, Whitney and his team will reveal a stock idea that they believe could double or more.

Whitney only asks that you register in advance right here. More than 20,000 folks have already signed up... And if you're looking for valuable insights about the November election, we urge you to join them.

The High Bar Walmart Plus Has to Reach

Walmart+ launched this week as a rival to Amazon Prime. Vic Lederman, an analyst for Steve Sjuggerud's True Wealth team, breaks down why Walmart has a high bar to hit to achieve success.

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and follow us on Facebook, Instagram, and Twitter.

New 52-week highs (as of 9/22/20): Dollar General (DG) and Lennar (LEN).

In today's mailbag, feedback on our tongue-in-cheek vaccine idea from yesterday's mailbag, as well as thoughts about "China-phobia" and Dan Ferris' Friday Digest. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Regarding reader Joseph D.'s request for a vaccine for the 5 weeks prior to the election: Save the Neuralyzer for the 5 weeks AFTER the election." – Paid-up subscriber Gary S.

"China-phobia among Americans is only bone-headed if China isn't going to be hurt by coming efforts to make it pay for Covid and if it's not hurt by the West's responses to its hegemonic behaviors. Read Aussie Clive Hamilton's Silent Invasion for important perspectives.

"Understanding geopolitics may not help you or me make $$ in the short term but it may help medium- and long-term, that is if making money includes not losing money.

"China is finally coming clear as the geopolitical problem it's been becoming over the past two decades." – Paid-up subscriber Michael R.

"Hello Vic, I am one of Porter's early subscribers and over the years have learned much from this relationship... in recent years have successfully invested in China with Sjuggerud.

"Some months ago I sold all China stocks because of CCP's creation and malevolent handling of the COVID-19 epidemic. Someday I hope you will realize that it is not all about profits... we must take a principled stand with evil.

"Yes, though these are 'private' Chinese companies, it has become clear they are not independent of the CCP." – Paid-up subscriber Bill W.

"Dan, Just catching up on my readings this morning at 8 o'clock of your last Digest, listening to Beethoven's 5th Symphony. And the music is so soothing and elevating. Keep it up." – Paid-up subscriber B. Royer

All the best,

Corey McLaughlin Baltimore, Maryland September 23, 2020