Investors should avoid ‘dangerous strategy’ of positioning for US election outcome, top strategist says

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  • Shifting portfolio allocations based on a US presidential election prediction can leave investors missing out from gains come November, strategists at Principal Global Investors said in a note to clients.
  • The S&P 500’s median price return since 1928 under Republican-controlled governments was 10.4%, while under Democrat-led governments it’s 11.9%.
  • Investors buying in only during years when one specific party is in power leaves them losing out on “multi-years of annual returns,” the team said.
  • Picking stocks based on one presidential candidate winning is “a dangerous strategy,” as pre-election polls aren’t perfect and a 2016-like upset could drive losses.
  • Divesting before election day is also ill-advised, they said, as 17 of the last 19 presidential election years featured the S&P 500 posting positive returns.
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Adjusting portfolios to benefit from one party winning the US presidential election is ill-advised and investors should simply stay the course, Principal Global Investors said in a recent note.

The upcoming election is set to shake up markets and shift strategies no matter who wins. Some analysts view a second Trump victory as a boon for financials and oil firms, while a Biden administration would likely boost green energy companies and utilities. Markets are currently pricing in Democrats’ snagging control of the White House and Congress, but investors shouldn’t pay such forecasts much mind, Principal said.

For one, the team including Chief Strategist Seema Shah, Portfolio Manager Binay Chandgothia, and Chief Investment Officer Todd Jablonski see markets faring well no matter which party is in power. The S&P 500’s median price return since 1928 under Republican-controlled governments is 10.4%, while under Democrat-led governments it’s 11.9%. Split governments saw 10.4% gains.

“Had an investor only chosen to invest during years when one specific party were in full control, they would have lost out on multi-years of annual returns,” the team wrote.

Read more: David Baron’s fund has returned 93% to investors in the last 12 months thanks to a Tesla bet 5 years ago. He told us why he thinks the electric-car behemoth has much further to run, despite its huge rally.

Positioning for a specific candidate to win ahead of November also makes for “a dangerous strategy,” the firm said. Should election night mimic 2016’s upset, investors believing in Biden’s polling advantage could lose large sums of cash. An “active, long-term approach” is likely the best option for market participants, even those who may worry about one candidate and their policy platform, the team wrote.

Though the race is still fairly unpredictable, investors can expect heightened volatility in the run-up to election day, the firm said. Markets will look to continuously reprice the odds of certain policies being enacted, and such swings can drive choppier price action. Yet pre-election volatility is usually short-lived and usually gives way to additional gains. The S&P 500 notched positive returns in 17 of the last 19 presidential election years, the team highlighted.

Investors should remain fully invested through November, they added. Trimming risk assets through 2020 “makes sense” for those wary of economic recovery risks and stretched valuations. But extremely loose monetary policy will continue to bolster markets for the foreseeable future, and no election-day result can shift the Federal Reserve’s unprecedented relief efforts.

“While election-related noise may feel concerning, we do not believe that any of the potential election outcomes should be reason to go against these fundamental drivers of the market and significantly change portfolio allocations,” the team said.

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