If Joe Biden wins the U.S. presidential election, will the market collapse?

WITH THE U.S. ELECTION LESS THAN 100 DAYS AWAY, WHAT ARE YOUR CONCERNS? WILL THE LIKELY ELECTION OF A DEMOCRAT AS PRESIDENT MAKE THE MARKETS NERVOUS, OR WILL THE REPLACEMENT OF DONALD TRUMP ADD CONFIDENCE FOR THE FUTURE? WHAT SHOULD WE AS CANADIAN INVESTORS BE CONSIDERING?

Most polls are pointing to a decisive victory for Joe Biden, the presumptive Democratic presidential nominee. Oddsmakers also have Mr. Biden as a clear favourite to win on Nov. 3.

But whether a Biden victory will be good or bad for the stock market depends on whom you ask. Mr. Trump, predictably, has warned that stocks will “disintegrate” and “drop down to nothing” if he loses. His hyperbole aside, some investors have expressed concern that Mr. Biden’s proposals – including his plan to raise the corporate tax rate to 28 per cent from 21 per cent – could deal a blow to the economy just as it is recovering from the coronavirus pandemic.

But worries about a Democrat becoming president are almost certainly overblown, for a couple of reasons. First, the stock market is forward-looking, so market sentiment should already be reflecting, at least to some extent, a Biden victory. Yet, as Mr. Biden’s lead has widened to double-digits in many polls, the S&P 500 hasn’t fallen; it soared about 48 per cent from its March low – not the sort of reaction one would expect if investors were terrified of Mr. Biden becoming president.

Second, given the fragile state of the economy – and the fact that policy platforms are often subject to compromise after an election – it’s unlikely that Mr. Biden will try to ram through reforms that could deal a blow to the economy.

“Even in a scenario where the Democrats sweep the 2020 election … we still think it is unlikely that we see any fiscal-tightening measures in the near term,” Tom Porcelli, chief U.S. economist with RBC Capital Markets, said in a note this week.

“In fact, if the recent House bills are any indication … the path of least resistance should the Democrats sweep [the presidency and both houses of Congress] in November is for much, much more fiscal largesse,” to stimulate growth, Mr. Porcelli said.

JPMorgan Chase & Co. sounded a similarly optimistic note about a Democratic victory. “Given the current economic weakness, business recovery and job growth are likely to be prioritized over policies that could dampen economic growth and perhaps even jeopardize the desired 2022 midterm election outcome,” JPMorgan strategists, led by Dubravko Lakos-Bujas, said in a July note. “We see [Mr. Biden winning] as neutral to slight positive.”

Even if the market were to sell off initially, history suggests that the damage would be short-lived. In the five instances since the Second World War when the Democrats swept the presidency and Congress, the S&P 500 fell by an average of 2.4 per cent in November after the election. But the index gained an average of 10.4 per cent in the following calendar year, with just one decline, according to CFRA Research data reported by CNN.

A more pressing risk is how the market will react if the outcome of the election is contested. Given Mr. Trump’s call this week to delay the vote, his complaints about mail-in ballots and his refusal to say whether he will accept the results, it’s possible that he will not go quietly if he loses. Markets hate uncertainty more than anything, and such a scenario could rattle investors. In 2000, for example, in the five weeks from election day until George W. Bush was declared the winner after a recount dispute in Florida, the S&P fell 12 per cent.

With coronavirus, widespread social unrest and Mr. Trump’s unpredictable nature all creating a volatile election backdrop, a lot could happen between now and election day. It’s also possible that Mr. Trump could prove the polls wrong again and win a second term, although he would have to overcome Mr. Biden’s commanding lead to do that.

But my advice is the same now as in any other year, election or not: Own a diversified portfolio of high-quality stocks (or low-cost funds), keep a portion of your capital in guaranteed investment certificates or bonds, and have some cash on hand for emergencies.

Eventually, the pandemic will recede and, perhaps with the help of new leadership, the chaos gripping parts of the United States will pass and the economy will recover from its worst slump since at least the 1940s. Focusing on the long term, and resisting the urge to change your strategy based on an election – or any other short-term event – is the surest way to build wealth.