Are you sure you want to change languages?
The page you are visiting uses a different locale than your saved profile. Do you want to change your locale?
Disputed Election, Confused Market
The impact of the COVID-19 crisis on voting intentions among the US electorate has made the 2020 presidential election difficult to call. It is becoming more likely that the result could be disputed, leading to a period of policy paralysis, confusion for the investor and higher volatility in equity markets. Nevertheless, this uncertainty will not stop investors from trying to take advantage of possible outcomes and we expect to continue seeing high trading volumes in sector ETFs.
Investors tend to position their portfolios cautiously before elections, and the nature of this year’s election suggests that we may see a similar approach. Historically, investors have increased their equity exposure after the event, and often in a pro-cyclical manner.
Sector Investing During Past Elections
It is difficult to identify a clear impact of US presidential elections at the market level; studies show little difference between market performance during Republican and Democratic administrations. However, at a sector level there can be major implications. According to S&P Dow Jones, the average range in monthly S&P 500 sector returns (calculated as the best-performing sector minus the worst performing sector) between 1990 and 2019 was highest (15.18%) in November during election years, far above the 10.8% average difference across all months.
Election impacts can be observed when investors price in the anticipated effect of the election winner’s policies on different market segments. A recent piece of research by State Street Global Advisors suggests that sectors are more sensitive to election outcomes than broad-based equity split by size and smart beta.
The opportunity (or risk) for sector investors is measured by the dispersion of performance between sectors – we only need to look back to the 2016 election as a prime example. While the S&P 500 rose just 4% in November 2016 following Trump’s win, there was 19.3% difference between the best-performing sector (Financials) and the worst-performing (Utilities). The chart below shows the whole range of performance across all sectors.
Cumulative Total Sector Returns in November 2016