The Only Thing Certain Is More Uncertainty

Mary Suplee |

The last two months in the run up before the election, people were very nervous about the markets. I had several conversations with people who just wanted the election to be over so the uncertainty would end. No such luck. Now, as we sit here two days after the election, we are faced with more uncertainty. How will this close presidential vote turn out and how will it impact markets?

In general, I believe that the makeup of Congress is more important than who is the President when it comes to having an impact on financial markets. Congress has the power over the purse strings as they control both the budget and any new tax laws. Arguably, it comes with input from the executive office but Congress has the power. They can act to add additional funds for Covid relief, additional funding for small business support and loans, additional stimulus packages, emergency unemployment compensation or funds to support industries severely impacted like airlines, hotels, and travel.

The Federal Reserve also has a huge impact on financial markets outside of the influence of the president. The stated goal of the Federal Reserve is to keep interest rates close to historically low rates for the next three years. They also intend to keep a large amount of liquidity in the financial system so there’s no shortage of credit for borrowers.

But the future is uncertain. You might have opinions or you might have a forecast about what the future holds but judging from all the pundits I’ve read over the last three months leading up to this election, they probably would’ve been more accurate just saying that it’s uncertain at this point. According to a pre-election survey conducted by 3 professors at University of Chicago, 87% of Democrats expected Biden to win and 84% of Republicans expected Trump to win. Not surprisingly, each party expects that the markets will boom if their candidate is elected and be a disaster if the other candidate wins. Predictions from polls did not seem to have much impact on expectations vs. likelihood.

Hypothetical Growth of $1 Invested in S&P and Party Control of Congress

Growth of $1 in S&P by Party Control in Congress

 

Keep in mind that over time, patiently staying invested has been a winning strategy. This is regardless of whether a Democratic, Republican, or mixed Congress was in office in Washington. One of our biggest bull markets was when Bill Clinton had to deal with a Republican house. These things are very hard to predict.

Uncertainty is just another word for risk. That is the cost we must bear to earn long-term market returns. The fear and greed that we see in the daily fluctuations of the market is what we need to tune out in order to focus on the long-term growth and prosperity of America. Remember, we invest in companies and not a political party. The President is just one of thousands of factors that impact returns.