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Will the Election Tank the Market?

With the first presidential debate behind us, there is one conclusion that most voters share.   More than any election in memory, voters believe if the “other candidate” is elected it will be an absolute disaster.  The thinking is that the damage will not be confined to walls on the border or Supreme Court nominees.   Investors fear economic calamity like 2008 if their favored candidate is not elected.

You could turn to the talking heads on the financial channels for guidance, but the truth is that none of us know what would happen in the markets if either candidate were elected.  Rather than deciding on which of the financial cognoscenti are correct, let’s consider how the market has reacted to apparent changes in fortunes with the major presidential candidates.

Soon after the Republican Convention in July, many pollsters pronounced the presidential race as even. Two weeks later it seemed to be a different world when Nate Silver’s 538 Blog gave Hillary Clinton almost a 90 percent chance of winning using national poll numbers.

While the presidential election is not the primary factor that moves markets, the party conventions in July did command the headlines.  When the race seemed even on July 29th, the S&P 500 index that includes the largest US company stocks closed at 2,174.  Once the race seemed like Clinton’s to lose on August 15th, the S&P 500 finished at 2,190.  This is not even a one percent rise in the index, which hardly seems significant when compared to the volatility that we saw in January.  This would hint that the market reaction to either candidate winning will not be as severe as many investors fear.

A Goldman Sachs research note implied that the election may have greater impact on individual sectors and assets than the stock market as a whole.  Indeed, the Mexican Peso rallied mightily in the wake of what most termed a Clinton victory in the first debate.  Other sectors such as health care providers, which would be impacted by an Obamacare repeal, and apparel stocks affected by proposed Trump tariffs have tended to perform better as Clinton’s chances improve.

After surveying this evidence, it seems a Clinton victory will likely mean more of the same for the stock market in the short term.  A Clinton presidency is largely viewed as a third term for Barack Obama and largely a continuation of the status quo.   Congress is likely to be divided with the House still in control of the Republicans, which will also limit the change that a President Clinton could effect.

Most would agree that it’s harder to predict the financial impact of a Trump presidency as he doesn’t have a legislative record to evaluate and many of his positions on issues of the day are unknown.  My view is that a Trump victory would be a similar scenario as Brexit that happened in June.  It’s a result that would catch market watchers by surprise and would have countless unknown ramifications that could lead to a near-term downturn.  As Trump assembles his Cabinet and we gain insight into his initial four-year term, the market may ultimately revert to its original course.

You may view a Trump victory as a crisis, which many in Boulder County would when you consider Obama’s 70 percent support in 2008.  If that’s true in your case, consider the returns of a regularly rebalanced 60/40 stock and bond portfolio in the five years after notable crises according to Dimensional Funds.  The Savings and Loan Crisis in August 1989 preceded a 52 percent return, the Terrorist Attack of 9/11 was followed by an 84 percent increase, and a 43 percent return came after the Lehman Brothers bankruptcy in September 2008.

Even if the outcome of this election proves to be a crisis in your mind, don’t automatically conclude that it will be of similar import to your portfolio and long-term financial goals.