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Elections 2020: How Canadian stock market investors should approach battle between Trump and Biden

Jessy Bains
·3-min read
U.S. President Donald Trump and Democratic presidential nominee Joe Biden participate in their first 2020 presidential campaign debate held on the campus of the Cleveland Clinic at Case Western Reserve University in Cleveland, Ohio, U.S., September 29, 2020. REUTERS/Jonathan Ernst     TPX IMAGES OF THE DAY
U.S. President Donald Trump and Democratic presidential nominee Joe Biden participate in their first 2020 presidential campaign debate held on the campus of the Cleveland Clinic at Case Western Reserve University in Cleveland, Ohio (Reuters)

Investors might want to brace for short-term volatility in their stock portfolios, no matter the outcome on election night in the United States, because there’s a good chance we won’t know who won for days or even weeks. But over the long term, stocks may follow a similar path no matter who takes this White House in 2020

“A more negative outcome for the markets would be a delayed victory in terms of not having a winner for longer than a day after the election,” Jonathan Lemco, principal and senior investment strategist, Vanguard Investment Strategy Group told Yahoo Finance Canada.

“The markets dislike uncertainty so having a clear victor one way or the other is something that markets would welcome.”

Because the TSX is so highly correlated with U.S. benchmarks, Canadian stocks won’t be immune to turmoil.

Historically November and December bring strength to equity markets. And data going back to 1860 show no statistical difference in stock market performance between Democrat and Republican presidents. Lemco says the pandemic and the Federal Reserve will matter more.

Presidents don’t affect stocks

Talley Leger, senior investment strategist at Invesco, cautions investors against basing investment decisions on the election, because politicians have far less control over stocks than they think.

“Remember, consumer spending and business investment together are about 80 per cent of both the U.S. and Canadian economies. In other words, the private sector is the most important determinant of outcomes for the North American economy, not the government,” Leger told Yahoo Finance Canada.

“Valuation metrics like the price-to-sales ratio explain about 90% of the variability of stock market returns over 10-15 year forward holding periods. In other words, focus on fundamentals and stick to your long-term financial plan.”

Leger also cautions against staying out of the market if you don’t like the winner; unpopular presidents don’t equal poor stock market performance.

“Some of the best returns on stocks occurred when the president’s approval rating was in a low range of 36 per cent to 50 per cent, which is roughly where it is now,” he said.

Biden better for Canada

Philip Petursson, chief investment strategist at Manulife Investment Management, agrees that elections don’t historically have meaningful effects on stocks. With that said, he says a Biden win could be better for the TSX because of his approach on trade.

“The trade tensions between Canada and the United States coming from the Trump administration should diminish with a Biden victory and the relationship between our two countries will improve once again,” Petursson told Yahoo Finance Canada.

“This may benefit our materials sector and exports to the US of lumber, aluminum and steel.”

Although Biden opposes the Keystone XL pipeline, Petursson says the pledge to gradually shift away from fracking could be a boost for Canada’s energy sector.

Unless it’s a hedged fund, Canadian investors need to consider currency when buying and selling U.S. stocks. Peturrson expects the U.S. dollar to remain weak compared to the loonie.

“We believe a Biden presidency would result in larger fiscal stimulus, larger deficits and a faster depreciation of the USD. We anticipate a stronger Canadian dollar in this scenario,” he said.

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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