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Tuesday, October 20, 2020

What Happens To The Stock Market During Elections

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Important information about the stock market during elections that you need to know right now

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What’s going on with the stock market as we approach elections? Some very interesting things start to happen that investors need to be aware of as we go forward and approach November 3. Whether you use Robinhood or another brokerage, if you’re a dividend investor collecting passive income or not, this is important. Volatility is increasing and the stock market is about to go on a rollercoaster ride. Here are 3 reasons why:

Reason 1: Elections. In September, the S&P500 fell 3.7% but we are still up 9% in the third quarter of 2020 and overall for the whole year, we’re up 5%. People tend to think that if the current president remains in office that it will be better for the stock market because of loose regulations on corporations and taxes. Meanwhile, people think the democratic nominee would increase taxes on corporations and the wealthy. But if we look at historical data, elections actually play a lot less of an important role in the stock market. Since 1977 the economic growth rate average has been around 2.7% for the Republicans, and 2.9% for the Democrats. So actually, it’s about the same regardless of which party comes into office.

Reason 2: The stock market sees volatility because we had the President get the covid diagnosis. This unexpected announcement introduced more political uncertainty about what’s going to happen to the stock market, but now that he’s out of the hospital, positive news, the stock market should go up.

According to US Bank, data as far back as 1933 shows that regardless of who becomes President, Republican or Democrat, the stock market tends to underperform the following year, with bonds increasing a little more in price than stocks. When a new party takes power, the stock market goes up by about 5% the following year. But if the current president gets reelected, the stock market on average has increased slightly more at 6.5%.

If the current president gets reelected, stock market analysts show that following the year of a midterm reelection, the stock market has consistently outperformed the year before it. So whatever we finish this year at, if the President is re-elected, the stock market should do as well as, if not better in 2021 than we have in 2020 which so far is up by 5%.

Reason 3: The mysterious NASDAQ whale pushing up tech prices yet again. His name is Masayoshi Son. He’s the CEO of Softbank. Back in September nobody knew what was causing the stock market to behave the way that it was, but low and behold, we found Mr. Son to be the man behind buying call options for tech giants like Amazon, Google, and Tesla. Call options are when people buy contracts betting that a specific stock will go up in price. If you do this with enough money, it forces people to buy those stocks to cover their stock positions driving the price of the stock even higher. It’s a positive feedback loop that just keeps on going. Between April and September, doing this exact trading strategy, he is thought to have pushed up the NASDAQ index by as much as 60%.

So as far as volatility is concerned as we head into elections, here is what I’m doing. I’m saving a cash position to take advantage of any volatility which should peak 1 week before elections. The time period between Monday October 5th, to Monday October 12th, as well as the middle of this week due to the Stimulus Bill is crucial. Be on the lookout. If you’re thinking of sitting it out, consider this fact: going back to 1930, if you missed the S&P 500’s 10 best trading days in the last 87 years, your returns would have been 97%, but if you had stayed in the market, you would have made 14,962% returns, just something to think about if you were considering pulling your money out and waiting on the sidelines.

*None of this is meant to be construed as investment advice, it’s for entertainment purposes only. Links above include affiliate commission or referrals. I’m part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.

Links for further research:
https://bit.ly/30Bk2Hr (US Bank Research)
https://bit.ly/2SqWZdQ (Election Impact)
https://bit.ly/2Gr1baU (NASDAQ Whale)

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