By Carleton English and Al Root
Oct. 20, 2020
With Election Day two weeks away, investors are increasingly concerned with how they should position their portfolio. If history is any guide, they have little reason to worry.
Looking historically at the two-week run up to a presidential election yields similar results to a review Barron’s ran in July when there were 100 days until the election. In that review, Barron’s found that there is about an 80% chance the S&P 500 rises in the 100 days before the election, based on election data dating back to 1928. That compares to 60% odds for a rise in any other 100-day period.
There’s a similar chance that the S&P 500 rises in the two weeks leading up to election day. The average gains look attractive, too. The average rise for the S&P 500 in the two-week run up is about 1.8%. The average rise over any two-week span is about 0.3%.
Barron’s also sliced and diced the numbers to see if there is a difference in performance when one party is in power going into an election, finding that the average gain in the two weeks leading up to an election when Republicans were in power was about 3.3%. The average gain when a Democrat helds the nation’s top elected office was about 1.1%.
Don’t read too much to read into the party results. There are only 23 elections in total, too small of a sample size to be meaningful, especially since each election is mired in its own circumstances: wars, depressions, recessions, and, in the case of 2020, a global pandemic.
Though there is one thing to note from the figures: The nation has been split, politically, for a long time. Democrats have been incumbents 12 times. Republicans, including 2020, have been incumbents 12 times as well.
The reasons for improved performance around presidential elections are mysterious. One explanation is that investors hate uncertainty. Perhaps as an election approaches, investors get a better sense of who will win, alleviating some of the risk premium in the marketplace.
The eight months preceding this election has seen large parts of the economy shut down in an effort to slow the spread of the coronavirus. Unemployment, while off the lows seen in March and April, remains high and weekly jobless claims figures continue to reach historic levels. Social unrest has rocked cities since the this summer.
The past month, which saw the death of Supreme Court Justice Ruth Bader Ginsberg, President Trump’s Covid-19 diagnosis, and stimulus negotiations, has been particularly intense.
Investors, for their part, are positioning their portfolios for a “Blue Wave” in which Joe Biden wins the presidential election and Democrats take control of the House and Senate. That could be good news for so-called green stocks.
Still, investors would be wise to remember the 2016 election when polling made it appear almost certain Hillary Clinton would win the presidency. When it became clear on election night she would not win, futures markets plunged before they reversed course in trading the following day.
The takeaway for investors is there doesn’t seem to be any reason, historically speaking, to cut stock exposure immediately before a presidential election. At least that’s one less thing for investors to worry about.
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