This year’s presidential election is shaping up to be one for the history books. Not only has the event been overshadowed by pandemic and civil unrest, but America has never been more politically divided. Many are predicting chaos in the stock market no matter who wins, leaving investors wondering how to invest ahead of the election.
The biggest risk facing the stock market in November is chaos. Investors don’t like the unknown and that’s exactly what the 2020 Presidental Election is offering up. Some worry that for the first time in history, the transition of power in the White House won’t be peaceful.
Donald Trump has already hinted at the possibility that he may question a Biden victory due to mail-in voting. The result will almost certainly be volatility for the stock market as investors wade into uncharted territory. Watch the video below.
Barron’s Steven M. Sears recommended portfolio hedging , an inherently risky strategy, in a recent article based on the current political climate. Sears noted that the S&P 500’s indifference to political risks offers investors an opportunity to hedge for a 10% decline in November when the election is likely to cause a dramatic decline in stocks:
To offset a decline of about 10% around the presidential election, investors could buy three S&P 500 November $3,500 puts for $42,900 to hedge a $1 million portfolio. If the S&P 500, currently at 3581, declines to 3200 at expiration, the put value is worth $90,000, creating a $48,000 profit on the hedge. If the index is above the put strike price at expiration, the trade fails.
For risk-averse long-term investors, a hedging strategy may not fit. Instead, Nela Richardson of Edward Jones says investors should remain level headed and patient in the lead-up to the election.
Nela noted that a reaction to the November elections is likely—but that investors should prepare for short-term volatility rather than a long-term decline:
But if you look historically, it really doesn’t matter over the long term who controls Congress, who controls the White House… So any reaction we see — and I do think we’ll see a reaction to the November election — but it’s likely to be short-lived. It’s likely to be a knee-jerk reaction to what’s going on. And it’s likely to wash out over the longer term.
Nela’s sentiment is popular among Wall Street analysts. Ultimately, it doesn’t matter who takes power—history tells us that the market is likely to finish the year on a high note. That means investors can use the short-term November panic as a buying opportunity.
It’s tempting to follow the election polls and buy equities in sectors that will benefit from either party. Joe Biden, for example, is expected to provide a boost to renewable energy stocks while Donald Trump is seen boosting returns for big oil and financials .
Loading up on a particular sector now is a fool’s errand. Although Biden is ahead in the polls, Trump could still win. For example, over the past 92 years, when stock market returns were positive in the three months leading up to the election, the sitting president was reelected 87% of the time .
Trying to buy based on politics might not be smart once a winner is decided. While Republican policies are typically seen as more market-friendly, long term investors will find that the market behaves similarly no matter who’s in the White House .
The S&P 500’s median price return has been 10.4% when Republicans controlled the government. When Democrats were in power, that figure jumped to 11.9%, and split governments offered gains of 10.4%.
Using any temporary weakness in November to buy strong, financially sound companies is the only sure-fire way to ensure long-term gains. With all of the volatility facing the market right now, it’s wise to keep some powder dry and November could offer an opportunity to use it.