Investing Before Elections: Cash Or Risk?

The outcome of an election can have a significant impact on markets, but history suggests that investors should resist the temptation to make major changes to their portfolios in response to the latest polls or policy announcements. While it's understandable to feel anxious about the potential impact of an election on your investments, it's important to keep a long-term perspective and avoid making impulsive decisions based solely on short-term volatility.

- Market performance is more dependent on economic factors than election outcomes: While elections can influence the direction of markets, historical data shows that market returns are more closely tied to the outlook for the economy than the results of an election.

- The impact of government policy varies across sectors: Government policies can favour certain sectors while hurting others, but well-run companies with strong demand for their products and services can typically weather higher taxes or regulatory burdens.

- Focus on long-term financial strategies: Rather than trying to time the market, investors are generally better off staying invested and maintaining a long-term perspective.

- Maintain a diversified portfolio: Working with a financial professional can help you build a diversified portfolio that aligns with your risk tolerance and financial goals, regardless of the election outcome.

- Keep emotions in check: Emotional, knee-jerk reactions are rarely advisable in investing. It's important to base your investment decisions on sound financial principles rather than political preferences or short-term market fluctuations.

History suggests cashing out of the market before an election is a bad idea

History suggests that cashing out of the market before an election is a bad idea.

While it can be tempting to sell stocks and move to the sidelines until election results are finalized, historical data shows that giving in to that temptation has been unwise. The S&P 500 has generated positive returns in most election years since the index's inception. The four negative-returning years were due to recessions or global conflicts and had little to do with the election cycle.

Market returns are more dependent on the economic outlook than the election outcome. In fact, Vanguard research dating back to 1860 found no statistical relationship between the performance of a 60% equity/40% bond portfolio in presidential election and non-election years.

It's also worth noting that the stock market has historically grown in value over time, regardless of which party controls the White House or Congress. While there may be short-term volatility surrounding an election, the focus should be on the long-term investment strategy.

Instead of making impulsive financial decisions based on election results, investors should consider the following:

• Confirm access to cash reserves and maintain an emergency fund.
• Reduce major spending areas and direct savings towards investments.
• Utilize excess cash by investing in CDs or long-term growth opportunities.
• Explore strategies to reduce tax bills, such as donating appreciated shares to charities.

By maintaining a long-term perspective and focusing on financial fundamentals, investors can make more informed decisions that align with their personalized financial goals, rather than reacting emotionally to election outcomes.

The impact of government policy on sectors like energy

• Renewable Energy Promotion: Government policies can either encourage or hinder investments in renewable energy sources. For instance, policies such as subsidies, tax incentives, feed-in tariffs (FITs), and renewable energy targets can make renewable energy projects more attractive to investors. On the other hand, policy changes that create uncertainty or reduce incentives may discourage investments, as seen in some countries.
• Energy Mix and Security: Government policies can shape the energy mix of a country. For example, a government that favours domestic oil and gas production over renewable energy sources will impact investment decisions in those sectors. Additionally, energy security is a critical consideration, and governments may implement policies to reduce dependence on energy imports.
• Economic Growth and Market Dynamics: Government policies can influence economic growth, which, in turn, affects the energy sector. Pro-growth policies, such as tax cuts and reduced regulations, can boost the overall economy and specific sectors like energy. Similarly, government spending priorities can impact the energy sector, as seen with infrastructure investments or social services.
• Regulations and Standards: Government regulations and standards play a crucial role in the energy sector. These policies can range from emission standards to safety regulations and energy efficiency mandates. They can significantly impact energy companies' operations and investments.
• International Trade and Treaties: Government policies on international trade and treaties can also shape the energy sector. Tariffs, import restrictions, and international agreements can influence the flow of energy-related goods and services, affecting investment opportunities and market dynamics.
• Nuclear Energy Policies: Nuclear energy policies, including regulations, subsidies, and international treaties, can have a significant impact on the energy sector. Decisions to adopt, phase out, or expand nuclear energy can shape investment decisions and market dynamics.
• Climate Change Policies: With the energy sector being a significant contributor to greenhouse gas emissions, government policies addressing climate change can have a direct impact on the energy industry. These policies may include carbon emission reduction targets, renewable energy incentives, or regulations affecting fossil fuel use.
• Technology Innovation: Government policies can influence the adoption of new technologies in the energy sector. Incentives for innovation, research and development funding, and standards can shape the direction of technological advancements, impacting investment opportunities.
• Investor Experience and Confidence: Government policies can impact investor confidence and experience in the energy sector. Clear and consistent policies that reduce investment risk and provide long-term support can attract more investors. Complex or uncertain policies may deter investment, especially from smaller companies.
• Fiscal and Monetary Policies: Government fiscal and monetary policies can also indirectly affect the energy sector. Interest rate decisions, tax policies, and government spending can influence the overall economy and the attractiveness of energy investments relative to other sectors.

The likelihood of tariffs and trade restrictions on China

Tariffs and trade restrictions on China are likely regardless of the election outcome. Both parties seem to be competing to demonstrate their toughness on China. China has ample room to retaliate, which creates an elevated risk for multinational companies with substantial revenues from China, as well as companies relying on China-based supply chains and resources.

Donald Trump ran on a platform that promised steep import taxes, including tariffs as high as 60% on Chinese-made goods. He has indicated that he would also implement a 10% tariff on goods from other countries. Trump's previous presidency saw him impose tariffs on steel and aluminium imports, which affected several countries and had significant repercussions on trade practices and global supply chains.

Kamala Harris has stated that she does not align with the "protectionist Democrat" ideology and opposes widespread tariffs. However, her voting record and public statements indicate a cautious approach to free trade agreements. She has criticised Trump's extensive tariffs on Chinese imports, but the Biden administration has largely retained these tariffs. Harris has indicated that she will not tolerate unfair trade practices from China or any competitor that undermines American workers.

A second Trump administration would likely see the continuation and expansion of the existing tariff regime for China. A Harris administration would likely see continued restrictions on Chinese trade and investment, particularly in strategic sectors like technology and renewable energy.

Interest rates and the influence of Fed policy

Interest rates and the Federal Reserve's monetary policy have a significant impact on the stock and bond markets, influencing both consumer and business spending. The Fed's primary tool for conducting monetary policy is the federal funds rate, which is the rate at which banks lend to each other overnight. By adjusting this rate, the Fed can influence overall interest rates and control the money supply in the economy.

When the Fed raises the federal funds rate, it becomes more expensive for banks to borrow from each other, leading to a reduction in the money supply. This, in turn, makes borrowing more costly for consumers and businesses, discouraging spending and investment. Higher interest rates can lead to cutbacks in spending by stock investors and make it more expensive for companies to raise capital, potentially hurting their growth prospects and near-term earnings. As a result, higher interest rates can depress stock prices and cause a slowdown in the economy.

On the other hand, when the Fed lowers the federal funds rate, it increases the money supply and makes borrowing cheaper, encouraging consumer and business spending and investment. Lower interest rates can boost stock prices and stimulate economic growth. However, they can also lead to inflation, which undermines the effectiveness of low rates.

While the Fed's monetary policy has a significant impact on interest rates, it is important to note that Fed policy is not the only factor influencing interest rates. Other factors, such as government spending priorities and global economic trends, can also play a role in determining interest rates.

In the context of an election, the outcome can influence the Fed's monetary policy decisions. For example, if a pro-growth policy agenda is expected to be implemented, the Fed may adjust its interest rate outlook accordingly. Additionally, the market's reaction to election results can impact the Fed's policy decisions. For instance, if the market anticipates increased inflation due to a particular election outcome, this can influence the Fed's interest rate trajectory.

In summary, interest rates play a crucial role in shaping the investment landscape, affecting both the stock and bond markets. The Federal Reserve's monetary policy decisions, particularly adjustments to the federal funds rate, have a ripple effect on the broader economy. However, it is essential to consider other factors that influence interest rates besides Fed policy.

How to react to the tax proposals of candidates

It is important to remember that elections do not exist in a vacuum. It can be tempting to make changes to your investment portfolio in response to the latest polls or policy proposals, but this is usually unwise. While elections can be hugely consequential in terms of the direction of public policy, they should not dictate your investment decisions.

• Do not overreact to the tax proposals put forward by the candidates. Remember that tax policy may be more influenced by control of Congress than by who wins the presidential election. Major changes in tax policy are more likely to occur if one party sweeps the election, gaining control of both the White House and Congress.
• Keep politics out of your portfolio. The US stock market has grown in value over time, regardless of which party controls the White House or Congress. It is incredibly difficult to single out a specific cause for market movements or events.
• Focus on the long term for your investments rather than trying to predict what will happen in the immediate future.
• Work with a financial advisor to ensure your investments are aligned with your financial goals and maintain a well-diversified portfolio.
• Keep some cash reserves on hand. It is always good to have access to emergency funds or some amount of cash that is easily accessible.
• Do not make impulsive or emotional money moves ahead of an election. Instead, focus on your own financial circumstances and make decisions based on your long-term financial strategy.

Frequently asked questions