Preparing our portfolios for this election might just be the most creative thing we ever do.
The uncertainty hounding over the next 60 days prompts us to consider 3 things: what happens if Biden wins, what happens if Trump stays, and how can we prepare for either result?
Elections are notorious for fueling volatility that could send the market up or down 2-5% on results day itself: which is why we need to shield ourselves against all outcomes, and this is how beginner investors can do it.
A Biden Win Scenario
Biden’s narrative on Wall Street is far more positive than most presumed early on. His policies tend to stem away from targeting the finance industry, with the only market-bearing issue being his corporate tax increase from 21% (current levels) to 28%.
Theoretically, the increase above could be seen as bearish to the growth of stock prices: after all, if companies profit less, how can their stocks continue upward progress?
The real paradigm is different for two reasons: A) taxes are being increased in order to fuel fiscal spending and B) the proposed tax increase would only cut company earnings by an average of 5%. In other words, Biden’s corporate tax strategy would be able to improve the economy, create jobs and propel incomes across all classes: all while costing firms a mere pinch of corporate gains.
“We’re going to have people involved in the administration who make sure that we deliver an economic recovery that redounds to the benefit of the middle class - not like the coronavirus stimulus and not like the Trump tax bill, where the majority of the benefits went to the top 1%,” – Ted Kaufman, Senior Advisor to Joe Biden
Despite the mostly positive nature of the Democrat’s tax plan, the way this translates onto markets is a small but ephemeral selloff after a Biden win: think of it almost as a check-mark.
Figure 1: Short downturn followed by steady upturn (long term)
A democratic win would likely incur a minor sell-off post-result, because investors will take into account future reductions in profits (due to tax) and less lucrative market opportunities: (the best investment to benefit in this interim would be the VIX index, an asset that profits when the market moves down). Simultaneously, the diagram shows a downturn that's only short-lived, as a stock market under Biden is still positive looking forward.
Biden especially provides an element of certainty: with less geopolitical escalations and trade wars likely to materialize, investors can change their asset allocation to start adding more risk. In other words, market participants may deploy more cash into stocks and less into hedges (VIX, options, shorts): increasing demand for the former and therefore propping the market upwards in the medium-term. Hence, we see the smooth curve in Figure 1 as a viable outlook post-result, with some volatility in between that can be leveraged to our advantage.
A Trump Win Scenario
A successful re-election campaign for the current president would be positive for markets in the near-term; the bigger picture, however, is slightly marred by his controversial tendencies. In other words, think of a stock market under Trump’s second run as “more of the same”: an upward curve made from a series of w’s.
Figure 2: Short-term positivity with longer-term volatility.
This suggests that investors should be bullish on markets but simultaneously be ready to profit from geopolitical tensions and further trade wars: indicating a need for diversified asset allocation going forward.
Attesting to that, preparing for Trump’s next 4 years could involve a trifecta of strategies:
- Holding Gold: excessive money-printing and low interest rates (loose monetary policy) will continue to devalue the US Dollar and therefore propel gold upwards, as the Dollar/Gold pair have an inverse relationship.
- Cash in hand: The series of w’s suggest small buying opportunities along the path forward: keeping cash aside will allow investors to “buy-the-dip” with each market meltdown.
- Focus on energy, defense and tech: Trump’s substantial support of energy companies and desire for a tech revolution without China is likely to support companies in these realms (ExxonMobil, Lockheed Martin, Amazon, Microsoft etc.): especially if subsidies/tax grants/loans are given to such firms.
In terms of markets, presidential elections have fared worse in the past. Both contenders this time are positive for Wall Street: the caveat is solely about how positive. Biden’s narrative seems to support the economy more than markets, while his Republican counterpart helps the latter more than the former. Does that suggest a winner overall?
Figure 3: The Market's Prediction
According to the semantics above, the party which manages to benefit the market in the weeks before election day is usually yielded the winner.
Correlation or causation? We'll leave that for you to decide, after you've prepared your portfolio with the strategies above!