- A Charles Schwab chief investment strategist explained why making short-term bets ahead of the election is a risky strategy.
- In the span of the last 30 election cycles, there have been a range of significant impacts on market performance that had “little-to-no relationship” with the incumbent party in the White House, the strategist, Liz Ann Sonders, noted.
- Considering the multitude of market outcomes in every election cycle, she said “the economy impacts elections more than elections impact the economy.”
- Investors looking for clear connections between the election and market performance cannot expect easy answers, she said.
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Betting on election outcomes is risky as history makes it clear that the relationship between politics and the stock market is varied and absent of consistency, according to a chief investment strategist at Charles Schwab, Liz Ann Sonders.
While looking back at election history since 1900, Sonders found there were a range of significant impacts on market performance that had “little-to-no relationship” with the party in the White House.
But she noted, since that year, the stock market has performed better when a Democrat holds power in the White House than when the incumbent was a Republican.
Over the last 120 years, or 30 election cycles, 14 years witnessed a bear market, a recession, or decline in the stock market of more than 20%.
Observing a variety of market patterns in that time-span, she said: “the economy impacts elections more than elections impact the economy.”
Charles Schwab cautions investors against trying to make short-term bets ahead of the election, especially with regard to its possible outcome.
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Sonders said investors that are looking for clear connections between the election and market performance cannot expect easy answers.
“That does not happen with consistency when comparing economic variables, sentiment conditions, earnings growth rates, valuations, etc. to market performance … and it certainly doesn’t happen with politics and the market,” she said.
In case of a Democratic sweep, there are potential risks to significant policy changes around taxes, regulation, health care, and foreign policy.
If there is a contested election, political analysts expect the winner to be known by the “safe harbor” deadline of December 8. But important policy issues won’t be modified much, as there is bipartisan support for the Federal Reserve’s monetary policy, the anti-trust focus on American technology giants, and for more fiscal stimulus, even if there is no agreement yet on the size, or reach, of a new package.
Sonders told Business Insider that the surge in retail trading seen this year, especially in options contracts, raises the risk of speculative froth. But compared to 2000, when speculative fervor was pervasive across the spectrum of investors, it is now more concentrated in the retail-trading cohort.
“That’s a good thing,” she said, explaining that she would be more concerned if the same kind of speculation expanded to every cohort of investors.
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