As we approach the highly contentious US Presidential election this fall, tensions are on the rise. The political climate is charged with intense debates, heated discussions, and a plethora of predictions about the potential outcomes and their implications.
However, investors need not be distracted by this activity. In fact, historical trends and economic fundamentals suggest that the immediate political landscape may have less impact on the markets than one might assume.
Furthermore, some investors are bound to be drawn into the political theater, which may cause rash and short-term oriented decisions. For savvy investors, this should provide ripe investment opportunities if they concentrate on what really matters.
Here, we will discuss how investors can think about managing their portfolios to limit the risk and maximize profits through this uncertain period.
The Irrelevance of Political Parties to Market Performance
Regardless of which party secures the presidency, it’s crucial to recognize that both major political parties have a vested interest in ensuring the markets perform well. A strong market reflects positively on the administration in power, reinforcing confidence in their governance.
Over time, the US economy has demonstrated incredible resilience and strength, often weathering political changes with remarkable stability.
The narrative that the market’s direction is heavily influenced by the political party in office is largely overstated. Numerous studies have shown that market performance does not significantly differ based on whether a Democrat or a Republican is in the White House. Instead, broader economic conditions, corporate earnings, and global economic factors play more pivotal roles.
Maintaining Focus on Investment Processes
Given the strength of the US economy, investors would benefit from doubling down on focusing on their investment processes and sticking to them. Emotional reactions to political events can lead to hasty decisions that may not align with long-term investment goals.
By adhering to a disciplined investment strategy, investors can navigate through the election period with greater confidence and stability.
What should investors focus on instead?
There are several timeless principles…
• Price action: Follow the trends and let the market guide you to what is working and what isn’t.
• Earnings: Own stocks that are growing their profits and sales. Over the long run a stock’s returns will reflect the long-term growth of earnings
• Valuation: Don’t buy stocks that are too expensive. When a stock is trading at a premium much of its future profits are already priced in. Look for stocks trading near or below their historical median valuation.
• Risk Management: Don’t put all your eggs in one basket. Putting more than 15% of your portfolio into a single stock is likely too concentrated. Have a diverse mix of stocks, let your winners run and cut your losers.
• Zacks Rank: The Zacks Rank is one of the most powerful investing tools out there. By using the collective knowledge of all analysts’ earnings estimates it produces compelling investment recommendations daily. Use it as a starting point of your research process.
Election Year Analog
Looking back at previous election years can provide valuable insights into how markets might behave.
For instance, in 2020, we witnessed a significant run-up in the stock market through the summer, a trend that parallels current market conditions. However, this was followed by a period of heightened volatility and choppy sideways action until the election results were finalized.
I believe it is possible that we have a similar setup moving forward and would not be surprised if we saw a rise in volatility and a more challenging trading environment than we have had thus far in 2024.
Adopting a Defensive Strategy
For more tactical traders, considering a shift towards defensive stocks might be a prudent move during this period. Defensive sectors such as healthcare, utilities, and consumer staples tend to perform better during times of uncertainty due to their stable demand. Additionally, value and dividend-oriented stocks can provide a buffer against market volatility, offering steady returns even when broader markets are fluctuating.
Healthcare stocks, for instance, benefit from consistent demand irrespective of economic cycles. Similarly, energy stocks, particularly those involved in essential services, can provide stability. By rotating into these sectors, investors can potentially mitigate risks associated with election-related volatility.
Allowing Tech and AI Leaders to Take a Breather
The technology sector, including AI leaders, has been a major driver of market gains this year. However, during periods of uncertainty, these high-growth stocks can be more susceptible to volatility. Investors might consider allowing these stocks to take a breather, focusing instead on sectors that provide more stability and predictable returns.
This does not imply abandoning tech stocks altogether, but rather balancing the portfolio with a mix of growth and defensive stocks. The long-term prospects for technology and AI remain robust, but a diversified approach can help manage short-term risks.
The Alternative Approach: Holding Tight
For less tactical traders, the best strategy might be to simply hold tight. Given the promising long-term economic outlook in the US, maintaining positions in winning stocks can be a sound approach. Many of the current market leaders are likely to continue performing well post-election, driven by strong fundamentals and growth potential.
Long-term investors often benefit from staying the course, avoiding the temptation to make reactive changes based on short-term political events. By focusing on the bigger picture and maintaining a long-term perspective, investors can navigate through the election period without unnecessary stress.
Ignoring the Political Noise
As with any election, the 2024 US Presidential election is expected to be fraught with intense rhetoric and divisive narratives. It’s essential to recognize that much of this is political theater designed to sway opinions and garner votes. Investors would do well to tune out the noise and focus on objective economic indicators and their investment strategies.
Remember, we are all part of the same country, and the political noise, while loud, is often temporary. Maintaining patience and a sense of community can help keep emotions in check, leading to better investment decisions.
A Fantastic Buying Opportunity if the Stock Market Takes a Pause
Periods of market volatility and sideways movement, often seen in the run-up to elections, can also present fantastic buying opportunities. This “chop and pause” phase can lead to temporary dips in stock prices, allowing investors to purchase high-quality stocks at more attractive valuations.
Historically, such periods of uncertainty have allowed savvy investors to build or increase their positions in fundamentally strong companies that may have been temporarily undervalued. The key is to identify stocks with solid growth prospects, robust financials, and a competitive edge in their respective industries.
Investors should keep a watchlist of such companies and be prepared to act when prices dip. This strategy requires patience and a contrarian mindset, as buying during periods of uncertainty can be psychologically challenging. However, those who can maintain their conviction in the underlying value of their chosen investments often reap substantial rewards when market conditions stabilize and growth resumes.
By focusing on the long-term potential of these investments rather than short-term market movements, investors can turn periods of volatility into opportunities for significant gains.
Final Thoughts
The upcoming US Presidential election undoubtedly adds an element of uncertainty to the markets. However, historical trends, economic fundamentals, and disciplined investment strategies can provide a solid foundation for navigating this period. Whether adopting a defensive stance, holding tight to long-term positions, or seizing buying opportunities during market dips, the key is to remain focused and not let political noise dictate investment decisions.
By staying informed, balanced, and patient, investors can manage their portfolios effectively through the election cycle, ensuring they are well-positioned for future growth.
— Ethan Feller
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Source: Zacks