US Presidential Elections and Investment Strategies Explained

29 oct 2020

Disclaimer: this is a completely APOLITICAL analysis based solely on facts and my personal insight.
This is not financial advice. This is for educational purposes only.

In this analysis, I’ll be discussing my own thoughts on the elections, the effect on the stock market, and what we can do as investors.

To begin with, my guess is that Trump’s chances of getting re-elected is higher due to a few reasons:

- Shy Trumpers: We have seen Clinton dominate the polls for the previous election, underestimating the number of conservatives who weren’t open about their political views
- The Democratic Criteria: Traditionally, democratic candidates who won the elections qualified for either one of these:
1) Someone who had the presidential aura and vibe to begin with, absolutely dominating the campaign over his republican counterpart
Ex) Franklin D. Roosevelt, JFK
2) Someone people never even imagined would be president
Ex) Barack Obama

Biden is a political veteran, and someone who isn’t unexpected, as he’s the former vice president. Therefore, he doesn’t fit the conventional model of democratic candidates who have won the presidential elections.

However, there are always elements of surprise, and no one can really accurately predict the results.

The real surprise is that the result of the election does not have a direct impact on the stock market.

Generally, investors tend to be more conservative than liberal. This is due to the fact that republicans are generally more:
- Business friendly
- Pro Free Market
- Less prone to regulations
- In support of the wealthy class

The psychological aspect of these traders is also reflected in the market.

However, data suggests otherwise:
Above in the chart, we can see the profitability comparisons of a case when a democrat is newly elected, in contrast to a case when a republican is re-elected. This is data from the S&P500 from 1924 to 2017.

Market participants believed that the economy and the stock market would underperform with a democrat as president, because liberals tend to focus on distribution of wealth more so than the accumulation of it.

However, in the inaugural year, the stock market demonstrates huge growth under the democrat president. This is because they start to realize that the distribution of wealth isn’t done as well as the president said it would be. In other words, people notice that having a democrat president isn’t necessarily bad for the economy.

In the same context, people have high hopes for a republican president to lead the economy upwards, but the republican president won’t do anything extraordinary compared to the democrat president. As such, the inaugural year returns are much lower.

Thus, considering everything, there isn’t much of a difference in the overall returns of a stock market under either a republic or democrat president. What matters more than the president’s political stance is market timing.

So what should we do as investors?
Based on the data of the stock market, and the psychological insight we can get from how investors react, our plan as investors can be organized as follows:

1. If Trump Gets Re-elected
The highest probable case for the stock market is that we see the market continue its uptrend for the short term. As I have previously mentioned in my other analysis, the current market is driven heavily by momentum, and Trump’s re-election will be identified as bullish news by investors.

(Above is the analysis on the current Nasdaq’s uptrend)
As such, in case Trump gets re-elected, it would be best to wait to see the market reach overbought territories for the short term, in order to cash out and wait for the next dip to buy in.

2. If Biden Gets Elected
The highest probable case for the stock market when Biden gets elected, is to see a temporary dip in the market. As the market is driven by momentum, investors’ fear, doubt, and uncertainty will be reflected in the market, leading to a short term correction.

However, as mentioned in my other analysis (chart above), the fundamentals of the companies sustaining indices such as the S&P500 or the Nasdaq index are solid. As such, over the long run, the news of Biden getting elected itself will not have any negative impacts on the stock market, and the correction will be a ‘buy the dip’ opportunity for the long term.

Conclusion
In summary, no one can accurately predict future events, or the market’s price action or reaction to such events. What we can, and need to do, is be prepared for all probable cases of outcomes. Above, I have provided my own take on the current situation, and how I plan on preparing for the volatility to come. These are the steps you need to follow to do your own research and analysis:

1. Establish a hypothesis, and conduct research and look for data to back it up
2. Think of all probable cases
3. Weigh in probabilities to all those cases
4. Think of an investment plan to prepare for all probable cases
5. Test your hypothesis
6. Revise your decision and thought process, and analyze why you were (in)correct.

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I would also appreciate it if you could leave a comment below with some original insight.