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Opportunity and Risk: Your Post-Election Trading/Investing Guide

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November 8, 2016
Financial markets and investments during Presidential elections.

By Wednesday November 9, Americans will likely have selected a new president. As the votes are tallied, investors and traders can use the time to be proactive in developing and modifying plans depending on the election outcome. Though the potential for post-election market volatility and risk may be high, it is important to remember that price activity can present opportunity as well as risk. 

It may be wise to map out your post-election trading plan. "If the elections results do not match your political beliefs, you can’t change that for a few years. However, your market beliefs are well within your control," says JJ Kinahan, chief market strategist at TD Ameritrade. 

Four Key Considerations about Markets and Elections

  1. Historically, after a presidential election, the stock market has risen more often than not in the final two months of the year. (Past performance is no guarantee of future performance.)
  2. Congressional control will likely matter.
  3. A disputed election could create more uncertainty.
  4. Post-election volatility could offer investors opportunities to adjust their portfolios based on sector outlooks. 

Higher Prices Ahead in November and December?

"During the final two months of election years since 1945, the S&P 500 gained 2.0%, and rose in price 72% of the time," says Sam Stovall, chief investment strategist at CFRA. Breaking down the wins by party, Stovall adds that "the market gained an average 1.7% following the reelection of the person or party, rising 70% of the time, but rose an average 2.3%, up 75% of the time, after the incumbent was replaced."

The presidential election polls remain extremely close and within the margin of error. "It does seem this will come down to the wire," Stovall says. The S&P 500 tumbled lower last week, touching a low at 2083.79 on Friday before rebounding higher Monday. "There is no question the sell-off was because of market nervousness about an improved likelihood of a Trump victory. It is not because Wall Street is Democratic or Republican, it is just because markets don't like uncertainty. There is less certainty with his campaign," Stovall says.

According to Stovall, some strategists predict that a Republican victory “would be such a surprise that the market will be thrown into a tailspin, similar to the 8% decline suffered in the two months after the unexpected re-election of Harry Truman in 1948."  

Kinahan adds, "As the election returns come out, I think the retail client that is looking for short term trading opportunities will find some volatility to do so and there will be some based on either candidate."         

Congressional Control Could Be Key

Pay close attention, not only to the presidential race, but also to the make-up of Congress. "I believe that an all-one-party President and Congress will add an extra level of volatility. Definitely keep your eye on the division of parties," Kinahan says. 

Stovall outlines these historical market performance numbers since 1945:

  • When Republicans controlled both houses of Congress: the S&P 500 rose an average 13.3%, and gained in price in 2 out of every 3 years.

      
  • When Democrats controlled both houses of Congress: the S&P 500 gained an average of only 7.4%, but rose in price more consistently at 73% of the time.

Disputed Election?

Some strategists are warning about the potential for a contested election, similar to the 2000 race between George W. Bush and Al Gore. In 2000, uncertainty hung over the nation amid recounts in Florida and ensuing litigation. About a month after the election, the race ended as a U.S. Supreme Court ruling delivered the final victory to Bush. 

If a similar scenario played out in 2016, it would inject a high degree of uncertainty over the U.S. political arena, which could weigh heavily on the financial markets. 

"The best case scenario for the market is that once the results are out, they are accepted. And, we march on with whatever the results are when they come out," Kinahan says.

Volatility May Offer Opportunity

Once you know the new office holders, whether it was your candidate or not, it creates opportunity for investors, Kinahan says. "You can adjust your portfolio to buy stocks in sectors, or ETFs representing sectors, in the areas that you think will do better based on the make-up of the new government." Figure 1 below outlines the issues potentially impacting the various stock sectors. 

            Platform Issues and Sectors

Sectors and issues.

FIGURE 1: SECTORS AND ISSUES.

Source: CFRA, used with permission. 

"For example, you may think that the new combination of office holders is good for financials and bad for energy longer term," Kinahan says.  In this example, consider using post-election volatility to pick up financial stocks or ETFs at attractive price and, once the dust settles, to lighten up your position on energies at reasonable prices, Kinahan says.  

"You do not have to turn over your whole portfolio immediately, but you have an opportunity to have your portfolio reflect your economic beliefs for at least the next two years until the next Congressional elections," Kinahan concludes. 

Sift Through Sector Candidates

Use Stock Screener to narrow selections based on sectors like financials or healthcare. Log in to your account at tdameritrade.com > Research & Ideas > Screeners > Stocks.

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