Why even this most bizarre of US elections could have limited investment implications

A criminal conviction, a disastrous debate performance, an assassination bid, a sudden withdrawal, another assassination bid – the list goes on. Put it all in front of a Hollywood studio executive and you might be laughed out of the screening room.

Even as Americans prepare to cast their votes, it’s still hard to rule out any possibility short of a coup by invaders from another galaxy. All things considered, maybe even that prospect shouldn’t be completely dismissed.

Yet is any of this genuinely significant from an investment perspective? Probably not. Regardless of how remarkable what we’re witnessing might appear now, the long-term implications are likely to be negligible.

This isn’t to suggest what occurs in Washington should have no bearing at all on investment decisions. But policies usually matter more than politics – and a business’s fundamentals arguably still matter most of all.

A race that’s too close to call – again

It’s first worth noting what isn’t extraordinary about this election. Amid all the court cases, career-ending flubs and other dramas, this race for the White House is too tight to call – just like every other race over the past 25 years or so.

Wind all the way back to 2000, for example, and – like now – we find the US’s voting population pretty much evenly split. Pollsters couldn’t separate George W Bush and Al Gore in the days immediately before the ballot.

Several counts were marred by inconsistencies – most notably in Florida, where Gore demanded a recount. Bush eventually assumed office only after a lengthy court battle other those infamous “hanging chads”¹.

The outcome in 2020 was also bitterly disputed, of course, with Donald Trump’s legal team challenging results in a number of swing states. The wider fallout from that saga is still playing out today².

So trying to position a portfolio to bet on victory for one side or another has been unwise for some time. This year’s contest offers no exception, meaning short-term adjustments remain largely the stuff of guesswork.

Politics and markets can be strange bedfellows

The longer-term picture isn’t exactly crystal-clear either. This is in part because politics and markets don’t always intersect as envisaged – a phenomenon by no means confined to the US.

For instance, we might expect oil and gas companies to struggle in the face of tougher regulation under a Democrat presidency. Yet this assumption is hardly reflected in how the US energy sector has fared over the past two presidential terms.

Energy was the worst-performing sector when Trump was in charge, yet clean energy stocks soared. Under Joe Biden, meanwhile, energy outpaced even the tech sector – but clean energy stocks lost around half of their value³.

Similarly, it might seem reasonable to suppose trade policies will have a sizeable impact. By way of illustration, could Apple – a stock we hold – suffer if higher tariffs are imposed on China, where many of its products are now made?

Not necessarily. Despite escalating tensions between Washington and Beijing, Apple enjoyed spectacular growth during Trump’s time in the Oval office – as did its fellow members of the Big Tech set⁴.

Focus on the business rather than the backdrop

All this underlines the potential perils of placing too much emphasis on an election’s outcome. Investors might be better advised to instead pay more attention to where polling day falls in relation to the business cycle.

History strongly supports this argument. Seven of the eight presidents between 1974 and 2020 oversaw double-digit equity returns during their terms, with only George W Bush missing out⁵.

Why did Bush fall short? It had precious little to do with his politics, less still his speech-making abilities or anything else. He just happened to hold office during the global financial crisis.

Ultimately, whatever the circumstances or backdrop, a key task for investors is to find quality companies with long-term potential. Generally speaking, the fortunes of such businesses are unlikely to be hugely affected by the identity of the Commander-in-Chief or the party he or she represents.

It’s invariably worth paying heed to the bigger picture, and politics is undoubtedly an important element of that. But the real truth is that for investors – whether in the US or elsewhere – what happens within the corridors of power may matter a great deal less than what happens within the individual companies whose shares they own.

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¹See, for example, National Constitution Center: “On this day, Bush v Gore settles 2000 presidential race”, December 12 2023

²See, for example, BBC News: “Trump wins as Supreme Court deals blow to Jan 6 case”, July 1 2024

³See, for example, MarketWatch: “An important reminder for investors as Tuesday’s debate looms”, September 10 2024

⁴See, for example, CNBC: “Here’s how tech’s most valuable companies have performed under Trump”, October 28 2020

⁵See, for example, LinkedIn: “What Presidents Reagan and Obama have in common: healthy stock markets during their terms”, September 3 2020 and Trustnet: “Markets don’t care about elections’: seven points investors need to keep in mind during the US presidential race”, March 12 2024

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Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.‍‍