Leading Up to Election Day:
As investors, it is very important to not let our own personal feelings of who one votes for interfere with making financial decisions for our clients. With 24/7 news and more information than ever, it takes a lot more work and research to narrow down what is important. It is essential to be organized and ready to make crucial investment decisions before, during, and after the results. Leading up to election day, our team here at U-Vest® Financial has a process that focuses on taking advantage of the opportunities that may present themselves in a likely volatile week of trading.
Who Does The Market Expect to Win?
Our investment team starts with this key question, as it is extremely important to analyze what result is likely already priced into the market (affecting our valuation of the companies share prices). What I mean by this, is the stock market is valuing stocks on how it expects them to perform, not on where they stand today.
While we do look some at polling averages, we find a lot of value in looking at different Vegas gambling lines as they are strong predictors of who the current “favorite” to win is. For example, as of the writing of this article, Biden is favored at -200 and Trump is an underdog at +180. If this were a football game, it would mean that Biden’s team is heavily favored to win the game. However, in sports many say “That’s why you play the game” because sometimes the underdogs do in fact win. On October 25th, 2016 Clinton was an even greater favorite than Biden is currently at -550, and Trump was a much larger underdog at +350. (This race is close, see Ivy Weekly Oct. 23rd Chart of the Week on how Covid Cases and White House betting odds chart: https://www.ivyinvestments.com/insights/presidential-election-goes-viral-1023 )
So, if these polls and Vegas lines do not answer the question of who will win, why do we even look at them? The reason is because as investors we want to know what the stock market has already priced into its valuations of future company performance. Currently, we believe that the companies that are more likely to benefit from a Biden/Harris ticket winning the election, may already be seeing a small boost from the fact that they are the favorites. Whereas, companies that could strongly benefit from a Trump/Pence ticket victory, may be seeing a slight pullback with the uncertainty of what is ahead. However, unlike most years, we believe that due to Trump winning against the odds in the 2016 election, investors are more hesitant to take a stand, and instead may make smaller plays or hold more cash until they can be more certain. Ultimately, this information helps evaluate client’s current holdings and investments that we may consider buying for clients.
Example: Let us assume the stock market expects XYZ stock to greatly benefit from the ending of Trump’s tariffs on Chinese made goods. Biden’s Campaign has stated numerous times that they will end these tariffs, which would benefit XYZ shareholders. We review our valuation of XYZ and put a value on what ending tariffs on Chinese made goods would potentially mean to their company’s growth and compare that to the current stock price. As the election approaches, we follow the polls, Vegas lines, and numerous other indicators to see if Biden is more likely to win or not. If that likelihood increases, we may consider buying more lots of XYZ stock as prior to the election. If that likelihood decreases, we may sell or hold the current lots.
Being Prepared for Either Result:
Following valuating company and sector expectations, we focus on what actions to take for each potential result. The different potential results are a Trump or Biden Presidency with a Split Congress, or one of these candidates winning while also having their specific party win the majority in both the House and the Senate. The fact of the matter is, no matter what happens, there will be “Winners” and “Losers” from these election results. As investors, we want to be prepared for what investment actions to make for each result. We recommend making a chart with all 4 potential results (Biden + Full Congress, Biden + Split Congress, Trump + Full Congress, Trump + Split Congress). On this chart, we list “Benefit”, “Drawback”, “No Change” for each potential result, and leading up to elections, we may g
Example: Our charts are much more extensive, however for the purposes of this article, this is an extremely basic example of a chart to show the concept:
Biden + Full
Biden + Split
Trump + Full
Trump + Split
Leading up to the elections we have followed the polls & Vegas lines, evaluated the markets expectations, and repositioned investments to be prepared for the potential results. However, on the night of November 3rd, unless there are still a significant number of votes to be counted that delay the results, we will learn which President will be inaugurated come 2021. We also will learn if the house will be fully controlled by one party or split. No matter what the result is, some certainty should be added to the stock markets. Since this election is very close, we are predicting a lot of volatility leading up to, on, and shortly after election day as investors will be repositioning into the investments they believe will perform best based on these results. As investors, we want to be prepared to continue to execute on our “Buy / Sell” charts as early as in pre-market trading the early morning after the election. One way we do this at U-Vest® Financial is by setting up our clients’ potential investments ahead of time, in drafts, this way after the pre-market opens, and as we watch what occurs on all of the companies we are looking to buy or sell, we can take action quickly. In times of extreme volume and volatility, which we believe could potentially happen in the upcoming week, we feel that being prepared to take swift action can make a big difference.
Valuate, Predict, Prepare:
The United States presidential elections are a rare situation where investors know a date and time an event will take place that will effect the investment outlook of many companies not just domestic, but across the world. This gives us an opportunity to take advantage of potential opportunities in the markets, because knowing the exact date and time of the elections gives us a chance to put a value on our current holdings, make forecasts on what may occur, and prepare to take action on the actual results of those forecasts. If you do not work with an investment professional, or are seeking an active investment approach, we encourage you to contact our team here at U-Vest® Financial. We tailor our investment approach to each client’s specific objectives, and take pride in focusing on wealth strategies that are all about “U”.
About the author:
This article was written by Michael Davino, CFP® on October 27th, 2020. Michael Davino is the CEO of U-Vest® Financial and has served clients in the financial industry for over 10 years. Michael owns multiple businesses and is an experienced investment professional. He is a lead on the investment team assists in research and trading for many of the portfolios that U-Vest® Financial Administers. Learn more about Michael or contact him here.
This article is meant to be general, and it is not investment or financial advice or a recommendation of any kind. The opinions and other information contained in this article are subject to change based on market or other conditions. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward-looking statements. Please consult your financial advisor before making financial decisions.