If your evening was anything like mine last night, it was spent glued to the TV closely following the election results as they came in. While we do not know the outcome and may not know for days or weeks, the market index for near-term volatility (VIX1 or “fear gauge”) is nowhere near the levels seen in March of this year. Additionally, the U.S. stock market is at a gain this week (as of the writing of this article).
It’s hard to overlook that this election is the first one taking place during a pandemic, where the results may take time to verify. That, combined with the warnings of possible civil unrest, may worry a typically calm investor.
By now you are likely familiar with the data that shows, on average, the U.S. market has returned 11.3% during election years.2 We often counsel investors to be wary of the phrase “this time is different” and, while we cannot predict what will happen in the market in the days ahead, there may be some volatility in store. We remain steadfast in our conviction that financial markets have the resiliency to weather any volatility that arises.
8 reasons why we believe markets have the resiliency to weather volatility
Below are eight reasons why we hold this conviction — which can help you maintain perspective about your investment portfolio as you digest everything that is going on this week:
- Election outcomes and their probabilities are likely already priced into current market prices.
- International stock exposure within a portfolio, which is one of the principles of investment diversification, provides a natural hedge in the face of a U.S. market decline.
- Exposure to investment-grade bonds can provide stability during periods of market volatility.
- Third-quarter S&P 500 earnings came in better than expected and showed that of the 64% of companies that have reported, 86% of them have beaten forecasts. Earnings are down about 10% year over year; however, that is much better than the over 20% decline forecasted at the beginning of this earnings season.3
- Current projections are showing a -3.6% contraction in GDP for the year, which is better than initially projected.4
- U.S. jobless claims last week were 751,000 — the lowest level of jobless claims since the beginning of the crisis.5
- The U.S. housing sector showed signs of strength as sales of previously owned homes climbed 9.4% in September — the fourth straight monthly increase.6
- October data shows that manufacturing activity in the U.S., Europe and Asia reported an acceleration, with some companies hiring workers after months of job cuts.7
Recent experience with the COVID-19 pandemic might provide some useful guidance to help combat current uncertainty. It wasn’t long ago in March that a significant market decline due to COVID-19 fears triggered even more fear in many investors. However, the markets quickly rebounded, looking ahead to the end of the pandemic and a return to a more normal economic environment. It is reasonable to expect that the markets will quickly look through this period of uncertainty, too, and regain their equilibrium.
The key question of who will lead our country for the next four years has yet to be answered, and coupled with the ongoing pandemic, it is clear that we are not out of the woods quite yet. However, it can serve as a helpful reminder of why staying the course is a logical action to take given all the information available to us as investors.
Elections: Who’s the real winner?
As we’ve seen in 2020, emotions — and stock market theories — can run wild during a presidential election year. We’ll leave you with some final thoughts on the relationship between elections and the market. In this short video, we cut through all the noise and look at the real numbers. Click below to watch the video and gain some much-needed peace of mind.