What an Election Means for Stocks – and What It Doesn't
Honey, get some bottled water, please... What an election means for stocks – and what it doesn't... The short-, medium-, and long-term questions... Greater forces are at work... Get aboard the 'Melt Up'... Our special election event with Ron Paul is coming...
A lot of folks, it seems, are preparing for Election Day...
My wife sent me out to get a case of bottled water last night... "Just in case," she said. In case of what, exactly? I'm still not sure.
Now, I know we can worry about some things... But I (Corey McLaughlin) don't think our kitchen faucet going dry or our water getting contaminated are among them – no matter who wins the White House next Tuesday.
But I suppose the point is, folks are starting to get on edge a bit about Election Day, if they haven't been already.
We pointed out a little more than a month ago that Wall Street traders were expecting stock market volatility to spike in November because of the uncertainty around the election... And whether it's for political reasons or because the reported number of COVID-19 cases is rising again, stocks have been selling off this week.
Through today, all three major U.S. indexes are down roughly 5% for the week. The CBOE Volatility Index ("VIX") – Wall Street's so-called "fear gauge" – climbed close to 40 today. That would've been a yearly high in every year going back to 2012... except, of course, it's 2020. As you might recall, the VIX soared to an all-time high of more than 80 in March.
Today, we're hearing Main Street stories about folks waiting in early-voting lines for more than six hours... people being confused over the mail-in process at the same time that record amounts of votes have already been cast... drop-boxes being lit on fire... and on and on.
In a recent survey, more than half of Americans admitted to stockpiling food and other supplies while gearing up for post-election chaos. At the same time, many of the wealthiest Americans are holed up in the Caribbean or some other remote place.
If things don't go smoothly on Tuesday night or in the days thereafter, should we be surprised? Probably not. But I still think we'll at least have running water.
That's kind of the point we want to make today... We're going to talk about the short, medium, and long term in regard to this whole thing, at least when it comes to stocks.
We'll likely see election-related volatility in the short term...
Our colleague Dan Ferris wrote about this in Friday's Digest, explaining how elections can be "tradeable events." He talked about the futures markets on the night of the 2016 election, for example...
Futures for the benchmark S&P 500 Index melted down about 5% as it became clear Trump was winning states everybody thought Democratic nominee Hillary Clinton would win. Likewise, the Mexican peso futures melted down 10% or so (if memory serves)... since everyone knew Trump didn't like the North American Free Trade Agreement and wanted to renegotiate the agreement.
By the next morning, though, the S&P 500 losses were gone... I remember someone posting on Twitter: "Best. Crisis. Ever."
There are some themes worth considering in the medium term, too, if history is any indication...
Stansberry's Credit Opportunities editor Mike DiBiase and Stansberry NewsWire editor C. Scott Garliss recently crunched some numbers on what election results mean for stocks and the economy (and vice versa) that gave us a few things to think about.
And then, Scott wrote about it all in his daily morning commentary today in our free NewsWire service. In the write-up, he specifically focused on gross domestic product ("GDP") and unemployment data history.
Given that Democratic challenger Joe Biden is ahead in many pre-election polls (if you are to believe them), Mike also looked at the average performance of stocks, as measured by the benchmark S&P 500 Index, in the years after there is a change in office from 1932 through today.
Here's what he discovered about when someone from the challenging party takes the White House...
Now, before we go any further, we'll be the first to tell you that history sometimes indicates a critical takeaway... and sometimes doesn't. You never really know until you have the power of hindsight.
And again, remember that we're talking about "average" numbers in this analysis. As Dan put it so well on Friday, averages can be misleading... And it also can be dangerous to pin predictions solely to what happened in the past. As he wrote...
A 6-foot man can drown while walking through a river with an average depth of three feet, after all... And an investor can lose a lot of money betting on an average outcome.
If you look closely, you'll see that the numbers reveal a mixed bag about the medium term...
If you're a supporter of President Donald Trump, you might not like to read this... But over the long run, the numbers lean toward "change is good" this time around.
In general, historical data from 1926 through 2019 show U.S. stocks have outperformed by an average of roughly 5% per year during Democratic administrations, compared with Republican administrations.
And over all four years of a first-term presidency, stocks have returned 68% after a switch to a Democrat.
But if you're interested in just a slightly different timeline, you might want a different outcome than a win by Biden... because the S&P 500 has tended to do significantly better in the first three years of a two-term presidency.
According to Mike, when there is no change in office, the benchmark index goes up 50% on average over the next three years, compared to 38% if there is a change.
It's only during the fourth year of a "switch" presidency to a Democrat where things really start to take off, on average, for the S&P 500. But again, there are all kinds of contributing factors to stock market performance in any given period.
So we'll now pause right here on parsing the data. You could go down a "rabbit hole" for a long time when looking at all this information, but there are a couple of clear takeaways...
- The "worst-case scenario" is not even an option this year. Statistically speaking, in the medium term for stocks, that's a switch to a Republican. (Again, on average.) It simply can't happen.
- If anything, the data shows the greatest differences in returns happen in the year before a presidential election rather than after it.
This is consistent with our belief that stock market performance tends to predict elections, not the other way around. As we wrote back in September...
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.
In the 22 presidential 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.
Conversely, in seven of the eight elections preceded by three months of stock market losses, incumbents were sent packing. Right now, the S&P 500 is up just slightly (less than 1%) from three months ago.
The historical odds on this point suggest a Trump win is more likely, but it could be different (or looking better) by Tuesday, depending on how stocks fare over the next several trading days.
In any case, there is another important factor to consider. As we also said in the September 23 Digest...
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.
So, this is all a long way of saying we might have already seen the greatest influence of the election on the broader stock market, especially for long-term investors, and vice versa.
As Scott told us in a private note earlier today...
Either outcome is positive for stocks because it removes the uncertainty overhang. They just have different outcomes depending on the time horizon.
As we've said before, in the long run, greater forces are at work...
As we pointed out in September, with the help of our colleague Dr. David "Doc" Eifrig, a presidential election is just one of many things investors take into consideration on any given day.
This is probably why there's no clear trend for stocks over the past 100 years based on the president or the makeup of Congress, either – whether Democrats or Republicans control the House of Representatives and Senate, or if there's a split in party control.
As Doc wrote in the September 25 issue of Retirement Trader...
The machinations of the Federal Reserve, the economy, and the thousands of businesses and millions of individuals wash out most of the effects a president can have on the stock market.
Doc urged his subscribers to "focus on those, rather than a single election. Sometimes something like a big tax cut can boost stocks, but that's a rarity."
That's why he recommended a specific trade, based on what we do know. In particular, Doc said it was a great time to sell options to those Wall Street traders who were betting on volatility in November.
This strategy is a tried-and-true way to profit from someone else's "fear" and help you earn income at the same time... And it doesn't matter what the buyer is scared of or who they're voting for.
Similarly, this is one of those times when it's valuable to look for the 'surer things'...
By that, we're talking about the things that aren't going to change.
On Tuesday night, we'll know – at least in part, hopefully – whether the Electoral College map will be "red as hell," as President Trump likes to say, or if a "blue wave" has hit the country like another hurricane.
But either way, our editors see a few constants playing out over the next four years and in the long term...
The "Battle for America" is on, as is the battle for the "soul of money"...
There is no end in sight for dangerous amounts of more money-printing, deficit spending, and greater devaluation of the U.S. dollar...
The Federal Reserve has signaled low interest rates for the next few years, a strong tailwind to the housing market and a challenge for investors looking for decent yield...
Data is becoming more like the "new oil" every day...
True Wealth editor Steve Sjuggerud sees the "Melt Up" happening... Double-digit corrections are part of the story, and so is the ensuing "Melt Down." He's urging investors to get in on the stocks now that will soar in the months and years ahead.
Click here to watch Steve's latest Melt Up presentation.
Science and technology companies and stocks have never been more in the spotlight in recent memory than in 2020.
And as Cannabis Capital editor Thomas Carroll describes it, a "green wave" will hit the country in the months and years ahead – meaning the federal legalization of cannabis. It's closer than you think, according to Thomas.
Infrastructure spending, in some form, is going to be important, too.
These things are happening no matter who is in the White House... That's what should matter most for long-term investors.
Yet at the same time, as we started today, we must still think about the short term – like the amount of bottled water in my basement.
And we know that "it doesn't really matter in the long run" isn't a satisfying answer for folks who are looking to make the most of their money today.
So with all this said, be sure to pay attention to your inbox in the days ahead...
We'll be sharing information about how you can watch a special "Election 2020" briefing featuring former presidential candidate Dr. Ron Paul. Today, he is warning everyone to "prepare for the election aftermath."
We absolutely love hearing from Ron whenever we get the chance. Everyone should listen to his "sound money" approach. And he'll be joined by our Director of Research Austin Root, who has come up with an election solution for all investors.
Together, Ron and Austin plan to cover everything you need to know about the presidential election... why higher taxes could be on the way... what the ultimate "end game" is for all of this... and how best to position your portfolio and investments in the weeks, months, and years ahead.
As I said, you'll want to stay tuned to the Digest and your e-mails for more details and a link to this special event in the days ahead.
The Best Stocks for a Trump or Biden Win
MarketRebellion co-founder Jon Najarian speaks with our colleague Daniela Cambone about how he is positioning himself ahead of the U.S. presidential election, as well as stocks he's watching right now...
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, and Twitter.
New 52-week highs (as of 10/27/20): Alibaba (BABA), MarketAxess (MKTX), and Match Group (MTCH).
In today's mailbag, more feedback for Ten Stock Trader editor Greg Diamond. Do you have a comment or question? As always, e-mail it to us at feedback@stansberryresearch.com.
"Greg, Your comprehensive analysis is so categorically different than anything else on the street and so totally logical and comprehensive, it blows me away!!! Until now, I have been grabbing little tidbits here and there. Now I have a one stop shop for info and guidance... There is NOTHING else out there that compares! And what there is, is just fast buck fast talk that doesn't take you very far. I'll take your style and your sense of caution all day long." – Paid-up subscriber Alex N.
All the best,
Corey McLaughlin
Baltimore, Maryland
October 28, 2020