Ballots, Bulls and Bears
In no uncertain terms, what really affects the stock market is uncertainty—because it causes people to doubt existing business plans. Today, the pandemic and global economic downturn, combined with a tumultuous U.S. election season, have clouded the outlook more than ever. Although these times can be unsettling, there are steps you can take to help combat the negative effects on your portfolio.
What Really Affects the Stock Market
Unfortunately for investors, too much uncertainty can trigger big swings in stock market performance. The Global Economic Policy Uncertainty (GEPU) Index looks at data from 21 countries to determine the degree of uneasiness around the world.
Global Uncertainty on the Rise
Global Economic Policy Uncertainty Index
COVID-19 Resurgence & U.S. Election
Worries increased through September and October about a global resurgence in COVID-19 cases and the outcome of the U.S. presidential election.
Greater clarity on containing the spread of the virus, limiting the global economic impact and getting through the election is needed to soothe market volatility.
The Global EPU Index is a GDP-weighted average of national EPU indices for 21 countries. Each national EPU index reflects the relative frequency of a country’s newspaper articles that contain a trio of terms pertaining to the economy (E), policy (P), and uncertainty (U).
Data from 1/1/1997 to 9/1/2020. Source: “Measuring Economic Policy Uncertainty” by Scott R. Baker, Nicholas Bloom and Steven J. Davis at www.PolicyUncertainty.com
Although the 2020 campaign seems more divisive than usual, the stock market typically has declined during the last year of a four-year presidential term. (Its best performance typically occurred in the third year of the term.) Stocks’ worst performances often took place in the months immediately after a presidential election before regaining its footing.
Markets Get Back to Business After Election Uncertainty Fades
Source: FactSet. Data represents returns of the S&P 500 Index from 10/31/1927-11/30/2017. Past performance is no guarantee of future results.
When all’s said and done, our research shows election results don’t drive financial market outcomes over time.
Getting Through Election, Market and News Cycles
The news cycle surrounding presidential campaigns can cause a lot of daily noise that may move stock prices up or down in the short term. The pandemic and other events in 2020 have added to the din. However, diversification is a known treatment to help soothe the stress on portfolios caused by market volatility.
Take for example the presidential election in 2000, when George W. Bush was not declared the winner until December 12. Although the election occurred during a bear market that didn’t end until 2002, the magnitude of declines during the contested period was remarkably different depending on the degree of diversification and risk.
This is important because for every loss your portfolio experiences, you need an exponentially higher return to break even. Portfolios with different types of investments may fall less and recover sooner.
History Shows Diversification Works
Returns Following a Contested Presidential Election
November 7, 2000 to December 12, 2000
Source: Morningstar. Diversified portfolios are represented by Morningstar category averages as follows: Aggressive Risk, Allocation 70% to 85% Equity; Moderate Risk, Allocation 50% to 70% Equity; Conservative Risk, Allocation 30% to 50% Equity. See Glossary for index and Morningstar category definitions. Diversification does not assure a profit nor does it protect against loss of principal. Past performance is no guarantee of future results.
How Do you Invest in Uncertain Markets?
It’s understandable that many people feel unsettled these days. Beyond the election, COVID-19 is transforming how we live and work and will remain a large source of economic and market uncertainty. However, great strides have been made in treating the disease and in the development of a vaccine, and we see signs of global economies recovering
We continue to believe that the best course of action is to focus on the factors you can control. These elements include how your portfolio is diversified and how much risk you are comfortable with. Following a plan that aligns with when you’ll need your money, your risk tolerance and your goals for the future is key to maintaining your financial wellbeing.
Securities offered through Securities America, Inc., member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. William R. Pintaric & Associates and Securities America are separate entities.
Written by American Century for distribution by David Pintaric.
Securities America and its advisors do not provide tax advice. Please consult with your tax professional regarding your individual tax situation.