Joe Biden vs Donald Trump for US President.
People are starting to ask about the impact on their investment portfolios of Joe Biden winning the upcoming US presidential election.
Interesting question, combining politics and investment.
The conventional wisdom is that Trump is great for shares. His tax cut of 2017 boosted the value of US shares and Republicans generally are seen as the more business friendly party. (They dropped company tax rates from 35% to 21%).
Current polls, notoriously unreliable, put a Biden presidency at a likelihood of 61% and a Democratic Senate (as well as a Democratic House) at 62%. Perhaps investors should be worried!
A review of the stats since 1900 suggest that Democratic presidents have been slightly better for the US share market than Republican presidents. Up 9% per annum on average for the Dems and up 6% per annum on average for the Republicans. However, this difference is within the margin of error as market volatility can easily swamp this difference on its own.
Recent commentary coming out of Wall Street is positive for a Biden presidency. JPMorgan, the largest investment bank in America, in its latest discussion piece, suggests that a “Biden presidency might be good for US shares.”
Myths abound, but when it comes to your investment portfolio it does not matter which party wins the White House. Blackrock, the largest fund manager in the world, concludes that a focus on which party wins the White House is unwarranted from an investment perspective and previous research we have done suggests that as well.
Below we look at some of the pros and cons of a Biden v Trump presidency and its effect on the US economy and US share markets. It is interesting as it brings together a lot of what is going on in the world today and it is more than just a democrat v republican argument.
A Biden vs. Trump presidency and its effect on the US share market
The winner: Biden = 5, Trump = 5 with 2 inconclusive (the environment and higher minimum wage)
It is just a bit of fun really, but it is interesting looking down that list. The most telling fact, I think, is that the share market as a whole is currently doing very well even as the polls are climbing for Biden, a democrat. Wall Street does not seem too phased by the prospect of a democratic President despite the warnings from … you guessed it, Donald Trump.
By far the biggest impact on share markets around the world does not come from presidents or prime ministers; it comes from Central Banks, like the Federal Reserve in the US, and their low interest rates.
What about unrealistically optimistic share markets at the moment?
People I talk to seem to think that share markets are being hopelessly optimistic with some like the tech-heavy NASDAQ index recently reaching all-time highs.
When you look inside the results of share markets you do not find that to be the case. Technology and some growth companies are doing very well and have become expensive dragging the indices up while the vast majority of companies are quite reasonably priced. It is the value v growth question again. Investors are betting on the big tech (growth) companies for a post-Covid world and they might be right, but at the other end of town there are some cheap value companies going for a song.
We are happy to focus on the cheap end of town as we believe that long-term success in investing comes from paying as little as possible for the future cash flows of companies (which is what you are buying when you buy shares) and you find these deals in value companies rather than growth companies, as a rule.
In summary, share markets are amazingly resilient and can cope with a variety of bad news and investors should not be spooked into trying to time the market around elections, no matter which way they seem to be going.
So long as you are well-diversified and have a logical plan it will work out over the longer term. It pays to stay in your seat even when the seemingly obvious signs seem to be telling you to ‘jump ship’.
Keep asking great questions …