Market volatility typically heats up every four years ahead of the U.S. presidential election and this year was no exception, as investors from both sides of the aisle anxiously anticipated results and the impending possible effect on their portfolios.
However, with contested results and two Senate seats still undecided, advisors and clients alike are left in election limbo. Despite some of the remaining uncertainty, Joe Biden is poised to become the 46th president of the United States, and investors are now looking ahead and hoping to put some of that volatility in the rearview mirror, welcoming stability after months of uncertainty. The question remains if the market can continue to shake off signs of stagnating economic growth.
To better understand investor mindset in such an unprecedented election year, E*TRADE Financial conducted a post-election survey to uncover investor sentiment and determine how advisors can provide counsel to clients heading into 2021, regardless of political affiliation.
Republicans brace for volatility, while Democrats skew more positive
Unsurprisingly, Republicans and Democrats have divergent economic and market outlooks. According to E*TRADE’s Politics and Portfolios study, Democrats see a shorter runway to recovery. More than three out of four (77%) Democrats believe election results will accelerate an economic recovery, while half of Republicans (51%) expect the economy to decelerate. Further, Republicans (64%) are significantly more likely than Democrats (47%) to expect more market volatility following the election.
Overall, though, a significant portion of both parties are bearish about overall market performance. According to the study, 44 percent of Democrats and 62 percent of Republicans are either bearish or believe the market will remain flat as a result of the election.
Both parties are eager to revisit their portfolios
While presidential priorities may present unique opportunities and risks to consider over the next four years, advisors shouldn’t let clients lose sight of the bigger picture. After all, history suggests the stock market’s longer-term course is unlikely to be determined by the party affiliation of the sitting president. In fact, the market has generally followed an upward trajectory and delivered positive returns under both Democratic and Republican leaderships. While the change in power is unlikely to affect the long-term performance of a well-balanced portfolio, clients are still weighing potential opportunities.
E*TRADE found that roughly three out of five Republicans (61%) and Democrats (58%) plan to make changes to their portfolio following the election. The most common strategy among Democrats is moving out of cash and into new positions (21%), whereas nearly a quarter of Republicans are looking to move out of current positions and into cash (23%).
As previously noted, there is also still a question around what the results of the Georgia Senate runoff election could mean come January. If Republicans retain control of the Senate with Democrats holding the House, the odds of seeing sweeping legislations are notably reduced. Under the new government, advisors may want to consider:
• Gridlock may mean status quo: Biden’s campaign advocated for, among other things, a massive infrastructure overhaul, a sustainable economy, and an expansion of the Affordable Care Act. However, without the support of both chambers of Congress, the new president may face opposition when it comes to enacting future policy. Translation: Energy, infrastructure, and health care initiatives may be less likely to occur, or smaller in scale than anticipated. This may mean new headwinds—or tailwinds—for related industries.
• Sweeping tax reform less likely: Biden’s proposed tax hikes also appear less likely to come to fruition under a divided government. But, in the event the administration does push through increases to corporate and top-tier tax rates, it’s possible the policy will have less of an effect on large-cap stocks, particularly those that derive considerable income from overseas business. Also, potential tax increases for high earners could push investors toward municipal bonds, since they are typically exempt from federal taxes, and sometimes state and local taxes.