2020 has been a year for the record books when it comes to ups and downs in the market. Soon you’ll see the financial headlines start to shift from the pandemic to the upcoming November election. The consensus is that the market prefers for President Trump to be reelected. Meanwhile, the financial media is leading investors to believe that a Biden victory would be bad news for the stock market. However, there are signs that the market may actually be betting on a Biden victory. Furthermore, action in betting markets is much tighter than they were in 2016. This suggests lower chances that the market will be caught off guard by either outcome (Trump or Biden winning).
Blue sectors are doing well
In a sign that the market may well be anticipating a Biden victory, “blue” sectors are performing very well. Sectors like clean energy and housing, which would benefit from Biden’s proposed stimulus, are two of the best performers in the market this year. Specifically, Biden has introduced a $2 trillion measure aimed at clean energy. He’s also called for a new homebuyers tax credit of $15,000 to help stimulate the housing market. Here’s a graph showing the year-to-date performance of each of these sectors as shown via a clean energy ETF (QCLN) and a homebuilding ETF (ITB), versus the S&P500 (bottom panel):
As you can see, these sectors have been moving with the broader market, which is normal. However, they’ve been vastly outperforming, especially in the case of clean energy! Moreover, the gains in each sector really started to accelerate in mid-May. While we’re leery of drawing any conclusions, that’s right about the same time Biden started to open up his lead on Trump in national polls and in the betting markets:
We absolutely do not believe that these sectors are going up solely because of Biden’s election odds improving. But for us, it’s less about what’s causing these sectors to rise and more about what would be keeping them from performing well. For example, housing stocks doing well can easily be explained by record-low interest rates. But in the case of clean energy, it’s a much more interesting discussion. President Trump has previously endorsed regulations that hurt the clean energy sector. Also, in April of this year, he tweeted that he will “never let the great U.S. Oil & Gas Industry down…” One might expect these types of policies and rhetoric to hurt investor sentiment towards the clean energy sector, but that clearly hasn’t been the case.
And what about China?
We’ve recently written about the strong performance of the Chinese stock market versus the US so we won’t spend a ton of time on it here. However, most agree a Biden Presidency would be a “win” for China. President Trump has even expressed his own beliefs that China wants Biden to win so they can “continue to rip-off the United States…” We saw how poorly the Chinese stock market performed throughout 2018 as Trump initiated a Trade War with the Chinese government. Yet, in the last two months, the Chinese market has actually been much stronger than ours. This even in the face of renewed and growing tensions between the US and China.
Now, just in the last few days, Chinese stocks have actually started to sell-off again. Most people have pointed to President Trump’s pending ban on popular Chinese apps TikTok and WeChat as the catalyst for the sell-off. However, these latest measures actually have bipartisan support. As recently as May, a number of high-ranking democrats joined republicans in raising concerns over TikTok. Therefore, we would argue that a number of these issues won’t necessarily go away with a Biden Presidency.
So does that then contradict our point that bullish action in Chinese listed stocks in the last two months is a sign the market is betting on a Biden victory? No, because Biden would still be softer on China than Trump. Both parties agree we need to be tougher on China. That could make any actions President Trump takes against China before the election hard to undo even if he doesn’t get reelected. At least that’s what we think the market might be thinking. Just look at Obamacare, which is still around, even though Republicans have been trying to undo the legislation for years.
2016 vs 2020 election
In 2016 the consensus was Hilary Clinton was going to win the election and that if Trump won it would be terrible news for the stock market. The immediate initial reaction to Trump winning was just that: futures markets plunged 5% overnight on Trump’s surprise victory. However, by the time the regular trading day finished up, stocks actually rose. And they would keep on rising, basically unimpeded, for 15 months. Without diving too deep there’s a simple takeaway from 2016 that can be applied to many market precedents: when the consensus is so one-sided, the market’s reaction is likely to catch a lot of people by surprise.
In 2016, pundits warned that a Trump victory would crash the stock market. Well, it didn’t. This time the warnings are that a Biden victory spells doom for stocks. Will it? We would guess probably not. Why not? Because if we agreed then we would be on the same side of the crowded boat that everyone else is already on. Furthermore, when comparing betting odds from 2016 to 2020, Trump’s victory in 2016 was a much bigger surprise than a Biden victory would be now.
Looking at the betting odds
Our graph below charts the betting lines for each candidate from the two elections in question. A negative number indicates a betting favorite and a positive number indicates a betting underdog. For example, In August 2016, Hilary Clinton was a -450 favorite. This means a bettor bets $450 for the chance to win $100. Trump, by contrast, was a +325 underdog. This means a bettor bets $100 for the chance to win $325. The odds in 2020 look much different: Biden is a -160 favorite and Trump is a +140 underdog:
- Hillary Clinton was a much bigger favorite than Biden is today, and Trump was a much bigger underdog in 2016 than he is in 2020.
- Betting lines saw much bigger swings month-to-month in 2016 than they are seeing in 2020 indicating much greater unpredictability then versus now.
Why any of this matters
Recently, we’ve had a number of conversations with people who think that if Biden wins the presidency, the market is going to tank. What we see is a market that is rising even as President Trump’s chances of winning reelection seemingly take a hit. Now maybe that’s because the market thinks the polls and betting odds are totally wrong. Or, as we would argue, maybe its because the market is less concerned with a possible Biden Presidency than the financial media would be leading you to believe. After all, they said the exact same thing about a potential Trump Presidency in 2016 and they were wrong.
So if you’re basing your investment decisions on speculation about who will win the Presidency in November, we think that’s a mistake. Evidence suggests there are areas of the market that will perform well no matter who is President. If you’re concerned about one candidate over the other, keep in mind that a diversified portfolio has historically been the best way to protect against those concerns. Take the following graph from Raymond James showing that investment performance shifts regardless of political party:
Sell-offs happen when markets are caught off guard
Lastly, the idea that Biden winning will catch the market off guard is likely misplaced. The betting markets are showing a much tighter race in 2020 than they were in 2016, and the polls are giving Biden a sizable advantage. We doubt the market is dismissing that information. In fact, we think the balance of evidence suggests the market may have already priced in a potential Biden victory. This isn’t to say the market wouldn’t prefer Trump wins reelection, it very well might. However, there is no way to know until we see the market’s reaction to whoever does indeed end up winning the election. Until then, we don’t think politics should sway your investment decision-making in a meaningful way.
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