Biding your time
How investors should react to a Biden win

As polling data continues to point towards a comfortable win for the challenger, Joe Biden, we look at what a Democratic win could mean long-term – and why investors should think strategically, rather than politically!

The world is watching as the United States gears up for one of the most important elections in its 244-year history on 3rd November. The two candidates couldn’t be more different – leaving investors to weigh up the impact of two extremes as the battle enters its final stages.

It’s a well-worn phrase that markets dislike uncertainty, and it seems that investors are bracing themselves for a turbulent autumn (not least because the US election isn’t the only headwind in play!).

In mid-October, FiveThirtyEight, a poll aggregator put Joe Biden’s chances at more than 86%, and many observers are now predicting him as a firm favourite to win the White House. The prospect of a Biden victory over Donald Trump hasn’t made the markets too downbeat, despite his promise to increase taxes (he has also committed to a meatier set of coronavirus relief measures than the current President, which may explain the lack of volatility on markets).

But looking beyond the result itself, what might a Biden victory mean for investors long-term?

Looking to the past

Traditionally, investors take a bearish view of Democratic presidents, citing a greater likelihood of business-unfriendly policies, such as tax increases and regulation, which can harm corporate profitability.

However, further analysis suggests things are not so clear-cut. Since 1933, Democratic Presidents have on average overseen higher stock market returns than Republican ones. However, nearly all of this outperformance can be explained by the boom years under Bill Clinton and the subsequent dotcom bust and Global Financial Crisis under George W. Bush. Excluding these two presidencies, the difference in returns is practically zero.

Actions speak louder

It would seem, therefore, that neither political party is exclusively ‘good’ or ‘bad’ for markets. Instead, what matters more is the policies Presidents choose to enact and their net impact.

Depending on who wins, some industries may be more advantaged or disadvantaged by the victorious administration’s approach to spending, taxes and/or regulation. Finance, healthcare and big tech are sectors that could be particularly exposed to potential policy changes.

For example, although Trump’s tax cuts were widely seen as a positive development for markets, his handling of foreign policy and trade issues had the opposite effect. If the Democrats win control of Congress, US share prices are likely to price in a rise in corporate tax rates. Biden has said he would partially reverse Trump’s tax cuts early in 2021. Coupled with a proposed increase in the minimum wage, which would also hit corporate profits, this could boost the appeal of non-US equities. However, there is a high chance that corporate tax reform would take a back seat in Biden’s first year in office while economic rescue packages are prioritised.

Although tensions between the US and China are likely to persist under a Biden presidency, there may well be a thawing of international relations elsewhere. This would be a welcome relief for global markets after the volatile years of Trump’s presidency.

Foreign policy decision-making rests with the President, but if the Republicans hold onto the Senate then Biden’s tax reforms are unlikely to pass. It could be argued that a tax status quo and an improvement in international relations would be the best-case scenario for global stocks.

Looking long-term

As we can see, investors would do better to consider the potential longer-term impact of the result on different sectors of the US economy – and what this means for your investments after the dust has settled on the result. An impartial mindset can also help alleviate the fear attached to either outcome.

It is worth reviewing your portfolio to ensure it is diversified by asset class, country and sector. By doing so, you will be in the best position to ride out any volatility, and exploit opportunities, created by November’s election.

Biding your time

Investing through any election can be a nerve-wracking experience, not least when the stakes are this high. But neutrality and a long-term outlook are an investor’s biggest assets when political risk elevates market volatility.

Impartial advice can also be prudent – if you are concerned that the US Election will affect your investments and would like to discuss your portfolio and your options going forward, please contact Wellesley Wealth Advisory today.