Writing a weekly column for so many years has allowed me to create a pretty good journal of world economic events. With the election only a few days away I re-read my thoughts from the prior presidential election. Just two days before the 2016 contest I finished my article with this line, “It has been an ugly fight and we are all tired of it.” I am pretty sure both sides today would agree with me on that sentiment.
History offers an amazing education and if we could just learn from it, we would be much better off. There are certain things in life that tend to repeat frequently, especially in economics and investing. It is very useful to learn from past events and a whole lot cheaper than making the same mistakes repeatedly. As we face the prospect of the presidential election finally being over this week (although the outcome may take a while to unfold), it is useful to consider what we have learned from the past that we can use to help make our investment decisions today.
One of the most important things an elections’ outcome does for investors is eliminate some uncertainty. Wall Street really likes to know what the future holds and the higher the uncertainty, the higher the volatility is likely to be. This past week has been evidence of that with its wild swings in the face of a number of unknowns.
For what it is worth, a few weeks ago most pollsters and pundits expected a Biden victory. That the markets were more stable back then would indicate such an outcome was largely priced in. After the second presidential debate the polling numbers began to shift and with it, volatility returned. It wasn’t that Wall Street doesn’t like Donald Trump but more that the shift created some uncertainty. We saw the same activity in 2016 when the markets had assumed a Clinton victory, then when it didn’t happen there was an immediate large drop in stock prices. Investors just needed a moment to work through the new uncertainty. It didn’t take long before they realized a Trump presidency would be favorable to the markets and stocks began a very long and fairly steep climb.
Based on history I am going to go out on a limb here and make a prediction. If Trump is elected, I think investors would be pleased because they already know his history and what to expect, although we could repeat the initial market shock after the win. If Biden wins, I would expect him to pursue a large stimulus bill like the one already passed in the house. His history in the Obama administration would indicate some bold stimulus action. The potential for such a stimulus, for better or worse in the long term, would likely be very welcomed on Wall Street. In either case, once the election outcome is assured, I am looking for markets to move higher.
Hi, I'm Dan. I'm a CFP® Professional.
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