Clients and friends of our firm:
As Americans’ angst over the election reaches its zenith, I know some of you are a bit on edge as well. If I haven’t spoken to you directly recently, here are my thoughts:
Pennsylvania Will Decide The Outcome
There are combinations of states that could conceivably lead to a victory for Harris or Trump without winning Pennsylvania, but those scenarios are unlikely. Therefore, the math of the Electoral College appears to dictate that whoever wins Pennsylvania will win the election. In 2016 Pennsylvania voted red (Trump). In 2020 it turned blue (Biden). The candidate that carries Pennsylvania in 2024 will most likely be the victor. “The Keystone State” is aptly named.
Historical Impact of US Elections on US Financial Markets
No doubt you have been inundated with dire warnings of what will happen to our country if the wrong candidate wins. The stakes have never been higher, the other side never more incompetent, conniving, and evil. The economy will tank, and the stock market will enter a tailspin. But let’s step back for a moment from the rhetoric. There have been other emotionally charged elections. What guidance does history provide? The simple fact is American elections make a tremendous amount of noise but have only a loose correlation to lasting stock market performance. History simply does not support a prolonged reaction. The typical market reaction to an election follows a somewhat similar pattern- an initial knee-jerk reaction in the wee hours of the morning after election night as futures adjust to the outcome, often followed by some volatility in the first 48 hours or so after the election. Afterwards, the country and the markets settle-in and a new equilibrium is found. In almost all cases, the amount of concern and angst carried by investors into US elections is not justified by the actual impact.
Further, we may care deeply about who is elected, but history indicates that the stock market does not have a strong preference for Republican or Democratic administrations. It generally thrives under both. Further, contrary to what might be popular perception, Democratic leadership holds a slight lead. These charts from Darrow Wealth Management tell the factual story of stock market performance since 1950, segmented by Republican / Democratic administrations:
https://darrowwealthmanagement.com/blog/stock-market-performance-by-president-in-charts/
The Exception – the 1860 Election
One election truly rocked the US causing severe stock market volatility followed by war. In 1860, the country was deeply polarized over a host of deep ideological differences including the all-important question of whether slavery would remain legal in the United States. The winning candidate (Abraham Lincoln) was so unpopular that he received no votes in 10 Southern states. The election results led to Southern states seceding from the Union and the start of the Civil War a few months later. The stock market was rocked. In 1861 the NYSE temporarily closed its doors due to the acute uncertainties and disruptions of the outbreak of war.
2024 – The Most Likely Short-term Impact
Many would argue that our country is more polarized now than at any point in our lifetimes. Tensions and tempers over this election are on edge. Nevertheless, despite how acute our differences, we’re not on the brink of an 1860 scenario. To be sure, there will be outrage and accusations from the losing party. Uncertainty may grip the headlines for a period. It should not surprise anyone to see some market volatility as we adjust to the results. Still, after the initial reactions, our conviction is the country and the markets will press forward and attention will return to corporate earnings, interest rates, the Middle East, inflation, Ukraine, and host of other issues. We’ll move on.
As to positioning in advance of the election, in our largest portfolio strategy we’re currently somewhat conservative with significant holdings of short-term US Treasury bonds as well as other conservative positions. Also, I note that purely from a cold, clinical view, we could benefit from some volatility. There are some positions we’d like to establish but have been waiting for better pricing to enter. A knee-jerk market selloff could work to our benefit. I’d rather not profit from my country’s dysfunction. Nevertheless, we remain alert to the possibility.
I wrap up with a question. Do you know what happened to the US stock market after that turbulent 1860 election cycle? In 1862 the stock market returned +53%. In 1863 it was +44%. There were opportunities for cool heads. I believe we’re adequately prepared for our 2024 election. Regardless of the outcome, may God continue to bless our country.