The 2020 Election’s Effect on The Stock Market

By: Batia Segal  |  November 25, 2020
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By Batia Segal

During the week of the election, CNN Business reported that the market is on track for their best week since April. In alignment with CNN’s prediction, the market hit an all-time high this past week. According to Google Finance, the S&P 500 rose around 1.37%. For background, generally, the market drops in price as national uncertainty rises because investors become fearful that they will lose out on their investments so they sell their stocks. On the other hand, when there is certainty, the market price rises because investors do not want to miss out on a good buy. With the uncertainty of this year’s election, it is surprising that the markets hit another all-time high. On the surface, it seems that the election results are uncertain due to voting delays and lawsuits. However, by taking a deeper look into the election results, it becomes apparent that the upsurge in market price makes sense.

What the Election Results Mean for Investors:

As mentioned previously, many expected turbulence in the market during election week. Because the predicted blue wave did not occur, the split congress offers security to investors. According to the New York Times, the Democratic Party has a majority in the House of Representatives and the Republican Party has a majority in the Senate. Due to the split congress, policies affecting an investor’s portfolio such as stricter business regulations and higher capital gains taxes are not likely to pass. In other words, for the next two years, current business regulations and tax laws are likely to withstand. By the same token, in order for a law to be passed, it must be approved by the House, voted upon by the Senate and either signed on by the President or — if vetoed — voted in at two-thirds majority by the Senate. With this in mind, it is important to note that any proposed law needs bipartisanship to pass. This provides an extra layer of certainty to investors because laws are not likely to drastically change.

Historical Market Performance Under Our Current Political Scenario:

Historically, market returns are highest when congress is split between the two parties. Although the market does not always follow historical trends, it is the closest source there is for predicting the future. According to CNBC, the highest returns occur with a Democratic president in office along with a split congress offering an average return on investment of 13.6% — with a Republican president in office and congress coming in second with an average yearly return of 12.9%. Correspondingly, our current political scenario includes a Republican president and Congress with a likely future political scenario of a Democratic president and split Congress. As previously mentioned, both our current and forthcoming scenarios return the highest average yearly rate on investment historically. In congruence with the historical market performance under our present political structure, investors are confident in putting their money into the market despite a seemingly uncertain presidential election.

Is Investing in The Stock Market the Wise Thing to Do At the Moment?

Generally, in order to grow wealth, a person needs to invest their money long term. Because of the hindsight benefits of buying low, many people wait for the market prices to drop before buying. This becomes an issue because while waiting they miss out on good deals. For the average person it is difficult to predict exactly where the market is heading — which is clearly presented by the election’s influence on the market. Therefore it is important for the average person to invest their money into an index fund such as the S&P 500 to incur long term wealth. In other words, the market does not solely depend on the person sitting in the executive branch, it depends on the investors’ certainty.

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