With the presidential election less than 3 months away, we know the election is on your mind; it’s on ours too. Here, we will share with you our thoughts on the election’s potential impact on the economy and the stock market. 

As the November 3rd election date approaches, nervousness may intensify as investors wonder “who is going to win?”.  That said, history has shown that the stock market may provide a hint as to which way the presidential election could swing.  According to LPL Financial, when stocks gained in the three months leading up to an election the incumbent party tended to win and vice versa when stocks were down.  In fact, this track record has been right every year since 1984 and 20 out of the last 23 elections.  This doesn’t mean that this is fool-proof, and this year may not look like any other (at least it hasn’t so far), but it gives us a signal to watch. 

Potential Election Outcomes

Election odds currently show that Joe Biden is favored to win the presidential election as of August 21st (56% chance) (Real Clear Politics).  While Biden maintains an advantage, it has shrunk over the last few weeks and there are likely more twists and turns to come. One thing that is different this year is the pandemic. How the virus is contained between now and election day is likely to have a significant impact on the outcome.

While markets may be impacted by the presidential race, the congressional races are just as important.  Currently, consensus is that the Democrats are likely to maintain control of the House, and that the Senate race will be close. 

An election outcome where one party sweeps the White House, House, and Senate has the potential for most policy change as legislating becomes easier.  Even then, any significant policy changes take time. Looking back at the last two presidents, both have only passed one signature achievement before losing the House during mid-term elections. (Invesco) On the other hand, if we have deadlock in Washington investors can move along with an understanding that while we may have changes ahead, these changes are less likely to be significant given the checks and balances in place. 

At the end of the day, regardless of which party wins, the US economy and stock market have performed well under both parties and many non-political factors influence the economy and US stocks.

Potential Economic Drivers

While there are many differences in the proposed policies of President Trump and Democratic candidate, Joe Biden, there are a number of significant economic drivers that may remain the same under any outcome.  In fact, each of these items is likely more significant for the market and economy than the election over the next 12-18 months:

1. COVID-19 Pandemic –This year the global pandemic has presented each one of us with many ongoing challenges, and COVID-19 has clearly been the biggest challenge for the economy and market thus far. With virus uncertainty still one of the biggest risks, the timing of a vaccine and a return to pre-pandemic activities will likely have more impact to the economy than the outcome of the election.
2. Monetary Policy – The Federal Reserve, and central banks around the world have tackled the pandemic with swift and very accommodative action.  This tail-wind is set to continue with the Fed indicating that a rate hike is unlikely over the next few years.
3. Fiscal Policy – We are likely to see supportive fiscal policy continue under either administration as further spending may be needed in an effort to boost economic growth.  

Policy Differences

There are, of course, a number of differences between the two candidates and many policy areas are likely to look quite different under each administration.  Each of these areas has the potential to influence different parts of the economy and stock market. We believe that policy changes are better viewed through a lens of tailwinds/headwinds to the economy rather than having the potential to upend the economic cycle which we believe is more likely to be influenced by the factors listed above.  The key areas to watch are:

• Taxation / Spending – Under a Biden presidency we’re more likely to see an increase in current tax rates, while President Trump has suggested further tax cuts ahead. That said, neither candidate appears to be ready to trim spending and the fiscal approach is likely to be expansionary under either candidate.
• Trade – Both candidates appear ready to maintain pressure on China, but many analysts feel that additional trade conflicts are more likely under a Trump administration while Biden is likely to take a less protectionist approach.
• Health Care – It appears a Trump administration is likely to leave the current system intact whereas Biden has indicated a desire to add a public option for medical care.  Some analysis shows this is likely to have a relatively small impact in the near term, but could be a stepping stone for a more long-term shift in healthcare.
• Regulation – President Trump’s first term has seen a significant decrease in regulation and is likely to continue if he wins a second term; whereas, a Biden administration is likely to tighten regulation. 

So, you may be asking, what does this mean for my investments?  Should I be making changes ahead of the election?  We strongly believe that the answer to that is “No”.  We work closely with each of our clients to determine an appropriate plan and asset allocation that is designed to help meet long-term goals and objectives with an appropriate amount of risk.  Our current portfolio positioning is more on the conservative side given our cautious economic outlook guided by our economic dashboard.  As we discussed earlier, the biggest factors impacting our dashboard moving forward are COVID-19, monetary policy, and fiscal policy.  The impact from each of these factors is likely to be larger than the impact from the election; however, the election still has significance.  We feel the outcome of the election, both presidential and congressional, may present opportunities or challenges for individual sectors as we look toward the next 18-24 months.  We will be ready to re-position portfolios to try to take advantage of these opportunities or avoid challenges as needed.

*Investment advice offered through TLWM, LLC., a registered investment advisor.

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

* Past performance does not guarantee future results. Investing involves risk, including loss of principal.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.

* Stock investing involves risk including loss of principal.

* This document is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Texas Legacy Wealth Management and its representatives are properly licensed or exempt from licensure.

* No strategy ensures a profit or protects against a loss.

* Portions of the material have been prepared by LPL Financial.