FA Center: What to do with your money now if the 2020 presidential election is giving you fits

With the Democratic and Republican conventions over with, we’re heading into the home stretch of what promises to be the most unusual election in U.S. history. No matter which side of the political aisle you’re on, you’ve probably either read or heard some of the lurid doomsday predictions made by so-called market prophets.

The sad thing is, these wildly inaccurate pundits spew the same hyperbole during every presidential election year. Depending who wins the office, they say, the market will either skyrocket or plummet.

Yet the market almost always ignores these politically motivated prognostications. Why? Because history shows that, over the long term, market performance isn’t affected by who wins presidential elections. Instead, investors react almost exclusively to events that affect the economy in general and corporate profits in particular.

Markets are also forward looking. For example, after dropping to its lowest level in a decade in March and April when the coronavirus largely locked down much of America, the S&P 500 SPX, -0.21% has since clawed back all of its losses. This has happened even while COVID-19 infection rates and deaths are still rising in many states and millions of Americans remain unemployed.

Why has the market recovered? Because institutional investors — the ones that do the majority of trading on Wall Street — are expressing their views that the current recession won’t last long and that corporations will start posting higher earnings in 2021. These investors also believe that the Federal Reserve will continue to keep interest rates at historically low levels and the government will continue to spend trillions on economic stimulus programs until unemployment rates drop to “manageable” levels.

These policies are unlikely to change even if Biden is elected president and the Democrats regain the Senate. The market knows this, and, absent a need to restore nationwide lockdowns, it’s likely to continue to move cautiously upward.

‘Democrat’ vs. ‘Republican’ markets

Do you believe that newly elected Democratic presidents cause market sell-offs or that first-term Republican presidents release the bulls on Wall Street — or vice versa? History debunks that myth. Need evidence? Take a look at how the S&P 500 has performed in the first full year of a newly elected president over the past 92 years.

*Great Depression started

**Recession year

Source: Macrotrends

Viewed solely through an electoral lens, you might assume that the markets reacted negatively to Republicans winning the presidency more often than Democrats. But this narrow thinking ignores both political and economic facts.

In most cases the negative returns were the result of an economic downturn that began after the new president had settled in office. For example, the market was flying high during most of the first year of the Hoover administration until the crash of October 1929 sparked the Great Depression.

Presidential politics and tax policies

What about those who say that when Democrats raise taxes wealthy investors run for the hills? That’s not supported by evidence, either.

For example, in 1990 President George Bush raised taxes on the wealthiest Americans, sparking the usual fears of a market selloff. Instead, the S&P 500 delivered positive returns in eight of the following nine years. In 2012, President Barack Obama allowed President George W. Bush’s tax cuts for Americans making more than $400,000 per year to expire. Investors didn’t panic. From 2013 to 2016 the S&P 500 delivered an average annual return of 12.45%.

The fact is, presidential politics and tax policies have little impact on the markets, and the stock market still tends to post positive returns over the long term. 

Unless you absolutely are going to need to use your invested assets for retirement income or other purposes over the next year or so, try not let your political views lead you to impulsive investment decisions that do more harm than good.

Ways to protect your money

If you’re convinced that the market is headed for a free-fall, there are ways to protect the value of your investments without hitting the panic button.

David Frisch, a financial advisor and president of Frisch Financial Group, has received many calls from scared investors who either want to get out of the market completely or are looking for ways to limit their losses. He tries to convince them to stick to their plans, but if they’re frantic about protecting against catastrophic losses, he discusses three possible strategies they may want to consider, even though he doesn’t explicitly endorse any of them.

1. Consider boosting cash and bond allocations: Selling a certain percentage of your stocks and investing the proceeds in cash or short-term bond funds can reduce potential losses if the stock market tanks without sacrificing potential gains if it rises.

But you have to make significant changes to your asset allocation for this strategy to offer any meaningful level of protection.

 “For example, if the investor’s portfolio is now 55% stocks and 45% cash or short-term bonds, moving to a 50/50 mix isn’t going to change their outcome all that much,” Frisch says. “And if they’re adjusting their allocation in a taxable portfolio, the amount they may have to pay in capital gains taxes when they sell stock positions may be higher than what they might have lost if the market went down.”  

2. Consider buying puts for bear market protection and potential profits: Another possible solution is to invest some of your money in put options. These hedging securities give you the right to sell an underlying stock or index (such as the S&P 500) at a predetermined price by a certain expiration date. If the index is down when you sell the put you may make a profit. If the index is higher than your put price when you sell it, your options will expire worthless but your equities may rise. 

“While a put won’t benefit investors when the market is rising, it’s a viable strategy for those who strongly believe that the market will fall over a defined time frame. Investing in a put can both protect the portfolio’s downside while offering the potential to make a profit should the investor’s bearish market sentiments come to fruition,” Frisch says.

3. Consider defined outcome ETFs to gain greater control over upside and downside risk: In the past few years, a new class of exchange-traded funds have emerged that are designed to help investors reduce potential losses over a predefined period. Defined outcome ETFs invest in options contracts that attempt to mirror the performance of a stock market index over a one-year period. Each ETF has a stated “buffer,” a percentage of losses an investor will be protected from if the ETF loses value, as well as a “cap,” which is the maximum return the investor will earn if the ETF’s price rises.

Here’s a hypothetical example. The XYZ S&P 500 Defined Outcome ETF-September 2021 offers a 9% buffer and a 16% cap. If you buy shares at its opening price on September 1, 2020, the first day of its term, and the fund’s value is down 20% on August 31, 2021, the last day of its outcome period, your actual loss will be 11% (20%-9%). Likewise, if the ETF is up 20% on August 31, 2021, you’ll miss out on 4% of that gain.   

 While on paper these defined outcome ETFs appear to offer investors the ability to restrict how much they can gain or lose to a particular range, in practice this isn’t necessarily so, Frisch says.

“Your actual outcome will really depend on the price of the ETF when you buy it and its price either at the end of the term or if you sell it beforehand. Considering that these funds typically charge management fees of 0.80%, compared to around 0.05%-0.10% for most ETFs, they’re more expensive, but these costs may be worth paying for the protection they provide.”

Get impartial, objective advice

All that said, Frisch discourages investors from rushing into any of these protective options. “I’ll try to remind them that the S&P 500 has finished in negative territory in only 26 out of the past 90 years, and nine of those years occurred during the Great Depression,” he says.

He also strongly advises investors not to try to implement any of these options on their own. Says Frisch: “Reallocating your portfolio, evaluating and buying put options and researching the many flavors of defined outcome funds requires a level of investment knowledge most people simply don’t have.”

Pam Krueger is the creator and host of the MoneyTrack investor-education television series seen nationally on PBS. She is also founder and CEO of Wealthramp.com, a free online service that matches consumers with qualified, fee-only financial advisers. 

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