With the US Presidential election less than three weeks away, Dan Lefkovitz, Indexes Strategist at Morningstar Indexes, considers whether investors should reposition their portfolios ahead of the November 5 election.
Take a guess as to which sector of the US stock market has performed best under the Biden administration? Industrials perhaps, given the emphasis on domestic manufacturing and massive infrastructure spending? Or is it technology, spurred by the CHIPS Act and AI enthusiasm? Neither would be correct.
Of Morningstar’s eleven US equity sector indices, the best performer from January 2021 through September 2024 has been energy—as in, traditional oil and gas related businesses. How can this be? Haven’t trillions been spent encouraging solar and wind as part of ‘Bidenomics?’ Weren’t reserves released to bring prices down? Yes, but market forces have boosted the sector. Both demand and production have risen. Mergers and acquisitions have been well received.
Surely, the disruptive Trump administration had more of an influence on stock market leadership? After his victory in November 2016, investors expected economically sensitive, domestically oriented sectors to benefit from regulatory rollbacks, tax cuts, and turbocharged growth. Financials, basic materials, energy, and industrials all enjoyed a ‘Trump Bump.’ Big Tech sank after the election of a candidate perceived to be hostile to Silicon Valley.
Yet, it was technology stocks that ended up leading under the Trump presidency. Expectations reset as infrastructure spending and other agenda items failed to advance. The growth of mobile computing and the cloud captured investor attention.
The lesson is clear. At the end of the day, earnings, cash flows, and valuations drive the performance of financial assets. While politics and policies matter, their investment impact is often overestimated.
Don’t Elections Move Markets?
Financial market volatility has surrounded voting in several countries this year. Morningstar equity indices focused on India, Mexico, South Africa, France, and the UK all reacted to polling results. Surprises have triggered the most significant moves. For example, when Prime Minister Narendra Modi’s party fell short of expectations, the Morningstar India Index saw a one-day loss of more than 6%.
But India is instructive. After the market digested the results, share prices recovered. Focus returned to the fundamentals: companies across sectors with accelerating earnings set against the backdrop of robust economic growth.
These days, investors are busy scrutinising the Trump and Harris economic platforms. The former loves tariffs and low interest rates. He would cut taxes, regulation, and immigration. The latter attacks price gouging and is keen to boost corporate tax rates. She would fund homebuying and childcare.
Yet, the road from platform to policy is long. Congress oversees taxing and spending. The Federal Reserve is independent—at least for now. In America, the judicial branch often has the final word.
Don’t Predict. Prepare.
Investors should remember that markets have thrived, and crashed, under administrations of all stripes. It is true that US stocks soared under Trump. But they also posted exceptional returns under Obama. Performance under Biden has been solid too.
Can we blame George W. Bush for the 2000-2010 ‘Lost Decade’ in US stocks? While the Bush administration passed large, pro-investor tax cuts, the aftermath of the late 1990s Dot Com Bubble, the shock of 9/11, the recession of 2002, and the financial crisis that began in 2007 suppressed returns. The broader context is clearly key.
Clearly, the interplay of politics with other variables is complex. Taxing and spending, policy and regulation matter. But the prices of stocks, bonds, currencies, and commodities move for all sorts of reasons.
For investors, politics present behavioral risks. Emotions can undermine the type of rational, coolheaded decision-making that investing demands. There’s a tendency to take a rosy view of preferred politicians and assume the world will go to hell in a handbasket if the opposition win.
So, what’s an investor to do? As we currently stand, US equities have enjoyed well over a decade of dominance. The US dollar has been king. Meanwhile, Europe and emerging markets have declined in stature. Growth stocks have trounced their value counterparts thanks to technology trends. US small caps have produced meager returns.
Portfolios should be ready for a range of scenarios because market leadership can change. Diversification is always a sensible approach, especially in the face of uncertainty. Predicting electoral results is hard enough; gauging their policy implications ratchets up the degree of difficulty. Betting on the market reaction to polling is just that: a roll of
