November 4, 2020
As many predicted, we find ourselves in an unsettled situation as election officials nationwide count votes in the contentious U.S. presidential election. Reminiscent of 2016, the closeness of the count defies polling that showed Democratic challenger Joe Biden ahead of incumbent President Donald Trump coming into Election Day.
Control of Congress also hangs in the balance. Democrats were expected to retain control of the House of Representatives, but that remains in question. And, as of this writing, control of the Senate is undetermined. These outcomes will have a tremendous impact on whether the eventual winner of the presidential election can successfully execute on his legislative agenda.
The strong opening for U.S. markets today contradicts overnight activity that saw global stocks rise and fall along with shifting election expectations. U.S. stock futures and key Asian markets fluctuated from negative to positive on election news. European markets also turned positive after opening lower.
We believe the market had priced-in a greater likelihood of a “blue wave” scenario aligned with polling suggesting a Biden win and Democratic control of both houses of Congress. With vote tallies indicating that outcome is less likely, we think today’s trading reflects investors adjusting their portfolios to reflect this new information. The shift is favoring growth-oriented sectors such as technology, health care, consumer discretionary and communication services. More cyclical sectors that would have benefited from a generous stimulus package are lagging. This includes energy and materials.
While an unknown outcome the day after the election is somewhat unusual (but not unheard of), big swings in the market are not. Since 1932, the S&P 500® Index has moved up or down an average 1.6% the day after a U.S. presidential election. However, those moves haven’t been indicative of longer-term results, and they have correctly predicted the market’s direction for the subsequent year less than 50% of the time.1
The global market movements of the last 24 hours help illustrate the challenge of making an investment “bet” on a political outcome. We know from history that markets go up more often than they go down. And, as we pointed out in September 2020 article those gains often come in short, sharp jumps that we can’t predict. So, attempting to get in and out of the market in anticipation of near-term volatility could hurt long-term results.
In recent weeks we’ve shared our observations on how each candidate’s policies could affect businesses. Ultimately, individual companies will deal with legislative and regulatory hurdles with varying degrees of success. Even within seemingly politically advantaged or disadvantaged areas of the market, some companies will fare better than others because of their unique capabilities and opportunities. How they maximize revenues and what they do with those cash flows largely determine their business results. Over time, we believe these factors drive investment success, not legislative or political wrangling.
1FactSet and American Century Investments.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
American Century Investments is not responsible for and does not endorse any comments, content, advertising, products, advice, opinions, recommendations or other materials on or available directly or via hyperlinks from Facebook, Twitter or any third-party website. Facebook, Twitter and LinkedIn are registered trademarks of their respective owners.