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Is President Donald Trump Or Joe Biden Better For The Stock Market? - YouTube
Channel: CNBC
[0]
September 2020 was
a particularly dismal
[2]
month for investors,
all three major
[5]
U.S. indexes posted
their first monthly
[7]
loss since the
beginning of the
[8]
pandemic in March.
[9]
And the CBO
volatility index, often
[12]
used to gauge the
market's fear, spiked
[14]
above 30 for the
first time since
[15]
mid-July. I think
this near-term period
[19]
where we have not
only covid winter,
[22]
but significant
policy uncertainty
[24]
about the United States,
when you can't
[25]
be certain who will
be the president of
[27]
the United States, what
party will be
[29]
in control. Then you're
going to have
[31]
some elevated volatility.
the market,
[33]
typically slows a little
leading up to
[35]
an election and
reacts more positively
[37]
in the short term
when a Republican
[39]
president is
elected.
[40]
The stock market
and the political
[44]
environment clearly
are closely
[46]
interrelated, and the
stock market
[48]
reacts generally to
political news.
[51]
And the stock
market watches the
[53]
outcome of the
election and the
[54]
presidential election
in particular,
[56]
very closely. Trump
tax reform, tax
[59]
code changes.
[61]
I mean, I criticize
aspects of it on
[63]
fairness grounds, but
the stock market
[66]
looks at earnings and
that tax plan was
[69]
a huge gift
to corporate earnings.
[72]
Remember, though, only
52 percent of
[75]
American families are
invested in the
[76]
market. Long term policy
has a bigger
[79]
impact on the
economy than market
[81]
performance. The
economy has
[83]
historically performed better
under a
[85]
Democratic
president.
[87]
The GDP grew one
point six times faster
[89]
on average, and
private sector job
[91]
growth was nearly 2.5
times faster on
[93]
average under
the Democrats.
[96]
But the election can
be an important
[97]
element for those looking
to earn big
[99]
in the market. So
how does the U.S.
[101]
election impact the
stock market and
[104]
how can
investors prepare?
[109]
Historically, the stock
market slows
[110]
down and shows a
weaker performance in
[113]
the period leading up
to the election.
[115]
On average, the
equity market showed
[117]
less than a six
percent gain during the
[119]
election years, compared
to an eight
[120]
point five percent gain
in any other
[123]
given year. The
stock market hates
[125]
uncertainty and of
course, election is
[127]
the ultimate
uncertainty.
[129]
I think particularly
after 2016, when
[132]
people expected one result,
we've got a
[134]
different result. Or
after 2000, when
[136]
you had an
extraordinarily tight race
[139]
and you saw the
market go down after
[141]
that. These are reminders
that this is
[143]
a piece of uncertainty
which you really
[146]
can't minimize.
[147]
And that uncertainty and
the fear of
[150]
what is to come
will generally depress
[153]
the valuations, which
would translate
[155]
into potentially lower
returns than the
[157]
year before an election
is to take
[161]
place. However, despite
a more modest
[163]
return, stock performances
during an
[164]
election year have done
well across the
[167]
last seven
presidential election
[168]
cycles. Average gains
for major indexes
[171]
like the S&P 500
and Dow Jones showed
[173]
positive returns in
the six months
[175]
before Election Day.
[177]
The only exception
being the 2008
[179]
financial crisis that
rocked the stock
[181]
market right ahead
of November.
[183]
Despite the concerns
over market
[185]
volatility following
the market
[186]
performance in
September, experts
[189]
reassured that volatility
is just
[191]
something to be expected
at this time
[193]
of year. Typically,
market volatility
[195]
or at least volatility
implied by the
[197]
buy the options market
will be elevated
[200]
ahead of an
election and generally
[202]
resolved following
an election.
[204]
If an election result
is going to be
[206]
conclusive and current
situation, we
[209]
might worry that
a resolution of
[212]
ultimate uncertainty is
going to take
[214]
some time if the
election is close or
[216]
contested. The bright side
is that for
[219]
investors is that
most of that
[220]
volatility can usually
set off some
[222]
pretty good
buying opportunities
[224]
because what will
happen, the markets
[226]
will adapt. The market
will just get
[227]
used to whatever
the new circumstances
[230]
are and it will
continue to go higher.
[232]
Barack Obama, a great
example for that
[234]
and certainly not the
kind of person
[237]
you would perceive as
being a friend to
[238]
Wall Street. But the
markets did great
[240]
during Obama's two
terms in office.
[242]
So it's just a
matter of adapting,
[244]
adjusting, getting past
that initial
[246]
bout of volatility
and figuring out
[248]
what you're dealing
with. Certain firms
[250]
like LPL Financial
have also tried
[252]
using past market
data and performance
[254]
to predict who would
win an election.
[256]
When you get within
three months of the
[258]
election, which is about
next week or
[260]
so, how stocks do
has a really good
[264]
track record for
who might win.
[265]
Now, here's what I
mean by that.
[267]
If the S&P 500
is higher, the incumbent
[270]
party tends to win.
[271]
And if the S&P
500 is lower, the
[273]
incumbent party tends
to lose.
[275]
Think of it like
this. Stocks have been
[276]
right every single
year since nineteen
[278]
eighty four. And they've
been right 20
[280]
out of twenty three
times, all the way
[282]
back to the
late nineteen twenties.
[284]
That comes out to
an eighty seven
[285]
percent winning
percentage.
[287]
If the stocks are
right again this year,
[289]
The winner would
be the incumbent
[290]
president, Donald Trump,
after a slow
[293]
market recovery since
the beginning of
[294]
August. However, some
market experts
[297]
remain skeptical of
drawing foregone
[299]
conclusion based solely
on market data.
[302]
Every election
is different.
[303]
Every election is
different because the
[304]
candidates are
different. Every
[306]
election is different
because the
[307]
environment is
different.
[308]
So I think you
have to really just
[310]
think about where we
are, what the
[312]
policy differences would
be, what the
[313]
personality differences would
be, what
[315]
the configuration of
Washington overall
[317]
would be after
the election.
[318]
You've got to factor
all that in making
[320]
investment decisions, but
you shouldn't
[322]
just resort to sort of
a back of the
[324]
envelope. This is
what happens with
[325]
elections, because I
just think that
[328]
that kind of
calculation is pretty
[330]
crude and not
not very useful.
[333]
So what happens once
the vote has been
[335]
cast and tallied, according
to a study
[338]
from the U.S.
bank, stock market
[339]
returns tend to be
slightly lower after
[341]
the year following
the election.
[343]
JPMorgan also discovered
that in the
[345]
short term, markets tend
to react more
[347]
positively right after
the election of
[349]
a Republican president,
possibly due to
[351]
the preconception
that Republican
[353]
policies are more
market friendly,
[355]
especially when the
election was close.
[358]
A surprise or near
a surprise outcome
[363]
where a Republican
president is elected
[366]
corresponded to a
positive market
[367]
reaction and a
surprise or close
[371]
election result in
favor of a
[373]
Democratic candidate
produced a
[376]
negative market
reaction.
[377]
However, in the long
term, it's a
[379]
different story. If we
look at the
[381]
entire presidencies, the
stock market
[384]
performs on average
much better during
[386]
Democratic presidencies
than the
[389]
Republican one. So the
bulk of returns,
[391]
positive returns in
the market actually
[393]
are earned
during Democratic
[395]
presidency. This could be
a bit of an
[398]
artifact of that of
the timing, and
[401]
this could be an
artifact of the
[402]
timing, because if we
look at the past
[406]
presidential elections,
Democrats are
[408]
more often the winners
in a recession,
[412]
whereas Republicans are
more often to
[415]
gain power during an
expansion or go up
[418]
close to the peak
of an expansion.
[419]
Changing the resident in
the White House
[421]
also impacts
the market.
[423]
Analysts found that
stock market gains
[425]
averaged at around five
percent when a
[427]
new party came into
power, compared to
[429]
six point five
percent when the
[430]
incumbent president is
reelected for a
[432]
second term. during the
first term of a
[434]
new president, there
is still some
[436]
uncertainty about what
the president's
[438]
policy is going to
be, and so the
[440]
market valuations might
reflect that
[443]
uncertainty. Whereas a
second term of
[447]
any president is
typically going to
[451]
continue the policies
of the previous
[453]
presidency, of the first
term of that
[455]
same president. And
therefore there is
[457]
less uncertainty for
the markets to
[459]
process and therefore
that might
[463]
contribute to a
higher, higher
[464]
valuations during that
second term.
[467]
In case of
general elections,
[468]
congressional results
could impact
[470]
market performance
similar to
[472]
presidential
elections.
[473]
Which party controls Congress
is not a
[475]
factor to
equity performance.
[477]
However, history has
shown that the
[479]
market performs better
under a divided
[481]
Congress as there is
less chance of
[483]
drastic policy
changes.
[485]
So the market will
do well with a
[487]
Democratic president and
a Republican
[488]
Congress or a
Republican president and
[490]
a Democratic
Congress.
[492]
A great example of
that was during Bill
[494]
Clinton's time
in office.
[495]
Most of the time that
he was there, he
[498]
was dealing with
a Republican Congress.
[501]
The same thing for
Barack Obama had to
[503]
deal with a Republican
Congress for a
[504]
good portion of the time
that he was in
[506]
office in the market
tends to like that
[508]
gridlock atmosphere
because they
[510]
figure, you know, we
don't really trust
[512]
you guys anyway. And
by having a split
[514]
party thing with it
kind of helps to
[516]
make sure you guys
don't break anything
[517]
while you're there,
Whatever the result
[519]
might be, a majority
of investors do
[522]
agree that the
presidential election
[523]
will have an impact
on the equity
[525]
market. According to
a recent survey
[527]
from Hartford Funds,
84 percent of
[529]
investors said the
2020 election
[531]
results will impact
their investing
[533]
habits. I only
see more uncertainty
[535]
ahead because the
election is probably
[538]
going to be close and
the result is not
[541]
going to be settled
for quite some
[543]
time. And so I would
say the risks are
[548]
definitely on the
horizon for
[550]
investors. However, almost
every expert
[554]
unanimously agrees that
placing stock
[556]
bets based on politics
isn't a great
[558]
idea. First of all,
people are biased.
[560]
People always think
that their favorite
[562]
candidate is going to
be best for the
[563]
stock market. Second
of all, people
[565]
think that they're able
to predict how
[566]
the election's going
to turn out.
[568]
And as we've learned
to in many
[570]
elections, we really
don't know.
[572]
And finally, people think
they know how
[573]
the market's going to
react when you
[575]
get that
election result.
[576]
I know a lot
of Republicans thought the
[578]
market was going to
go down when
[579]
President Obama
was elected.
[580]
I know a lot
of Democrats thought the
[581]
market was going to
go down when
[582]
President Trump was
elected, but in
[583]
fact, the market went
up both times.
[585]
So if you're biased,
you don't know
[587]
what the outcome is
and you don't have
[588]
the markets going to
react based on
[590]
that outcome. You
really shouldn't make
[591]
an election bet. The
2020 election is
[593]
also likely to be
very different from
[595]
any of the
past elections.
[597]
Given the state
of the economy
[598]
suffering from a
national pandemic.
[600]
I think investors
usually think about
[602]
the economy as being
the most important
[604]
thing when it
comes to investing.
[605]
But the truth is that
the fate of this
[607]
economy depends upon
the virus itself.
[610]
Until we control the
pandemic, we will
[612]
not have a
healthy economy.
[614]
So I think as
people think about
[615]
investing, think about
voting, the most
[616]
important thing is how
do you deal with
[618]
a pandemic? Because if
you can deal
[619]
with pandemic, get
past the pandemic,
[621]
then the economy will
recover and that
[623]
should be good
for portfolios.
[625]
The outcome of an
election can have an
[626]
entirely different effect
on different
[628]
sectors, making predictions
for future
[630]
market performances that
much more
[632]
difficult. The gridlock
in Washington
[634]
and the results could
also have a
[636]
different impact on the
market in 2020,
[639]
as many sectors are
counting on more
[641]
stimulus during
the pandemic.
[642]
Health care is going to
be huge in this
[645]
election. It's just
how the results
[648]
will determine the
future of that
[650]
sector. It's anybody's
ball game right
[654]
now. But after the
election is over,
[655]
you'll see investors
really start to
[657]
put their chips on
the table in terms
[659]
of where they think
the future is going
[660]
to go. Success
will ultimately depend
[663]
on how much risk
an investor is willing
[665]
to take. And, of
course, the more risk
[667]
tolerant person will
invest more in
[669]
stocks and reap the
benefits, and the
[672]
more risk averse
people will perhaps
[675]
stay more on
the sidelines and
[677]
potentially miss the game
as a result.
[679]
I think as an
investor, during a time
[681]
like this, you want
to make sure you've
[683]
got your
bases covered.
[684]
So it really is some
of the old time
[689]
diversity and those
kind of things.
[691]
Remember, any timing
decision when it
[693]
comes to investments
really means you
[694]
can make two good
calls, you know when
[696]
to get out and you
know when to get
[697]
back in. And I've
never met anybody who
[699]
can consistently make one
good call on
[701]
that. So I would
think that the right
[703]
thing to do is
think about where you
[705]
want to go in the
long run. What do you
[706]
try to do
with the portfolio?
[708]
Think about valuations
and place your
[711]
bets accordingly and try
not to try and
[714]
time investments around
an election.
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