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How Election Cycles Drive Market Cycles – Q&A with Tom Stringfellow

The 2020 U.S. election has come and gone. While the discussions surrounding the outcome continue, it’s possible that we’ll see a split government, which may leave some investors optimistic as they look to optimize their portfolio. But despite this unprecedented year, the 2020 election followed similar cycles as previous years, cementing the importance of long-term, strategic investing.

Against this backdrop, we sit down with Tom Stringfellow CFA®, President and Chief Investment Officer at Frost Investment Advisors, to get his thoughts on how investors should navigate election cycles, especially with a tumultuous transition period, what investors could expect with a new administration and the role of the Federal Reserve.

Question: We’ve seen several market swings over the past few days, but first want to get your thoughts on whether politics drive the market, or if it’s the other way around?

Answer: Politics tend to be an emotional issue that create investor angst during election season, but one doesn’t drive the other. Leading up to an election, it’s common to see market swings as investors focus on current issues and try to predict potential outcomes. Once we get past an election cycle, markets, companies and investors tend to adapt to new administrations and leaders in power, and markets tend to react and perform the same as things settle down.

Interestingly, a split government – which is a possibility – may be conducive to positive economic changes in the market. Divided governments often provide more stimulus for the markets because there’s less opportunity to enact drastic tax and fiscal policies and fewer changes that could potentially restrict business initiatives.

Question: Is the current market reflective of markets during previous elections?

Answer: Market trends and investor behaviors around this election are similar to previous election cycles, but the events over the past 10 months have had greater economic impacts on the market. The COVID-19 pandemic and resulting lockdowns created a more volatile market than observed during previous election cycles, but we’ve also seen similar themes in successful investing behaviors. Amid swings in the market during these tumultuous times, market trends show that outcomes are more favorable for patient investors versus those who react emotionally.

Question: To what extent do investors overreact when it comes to the election?

Answer: Elections, like other times of uncertainty, can spur emotional investing. Election cycles are difficult periods for individual investors to predict and take advantage of, and when you start letting your emotions or perceived skills take hold of your decisions, that’s often a recipe for disaster. Historical data shows that during these periods some investors lose out on gains by letting emotions take over rather than sticking to their long-term investment strategy.

We see this as investors start moving to the sidelines or moving into what they view as safe assets, such as fixed income. As investors keep pushing and bidding up with treasuries and corporate bonds, they’ve driven yields down over the last several months. Investors often let their emotional fears bid up safe assets and make them a little riskier due to pent up demand.

During uncertain times, we also see investors engaging in risky strategies such as day trading and trying to time the market. We’ve seen many investors make decisions out of fear or in anticipation of what they think might happen, moving a significant part of their assets into or out of the market. Then, when the market reacts, these investors are not always quick enough to take advantage.

Question: Finally, as we head into a new year, do you think the Fed has a greater influence on the market than lawmakers?

Answer: The Fed's impact has been critical amid the COVID-19 pandemic, having stepped in to stabilize the financial markets by ensuring liquidity. That said, one doesn’t have more power over the other as fiscal and monetary policies must work in tandem for optimal outcomes. Monetary policies provide stability, whereas fiscal policies enable growth by providing fiscal, tax or regulatory policies. These two separate policies have worked extremely well in helping stabilize and revitalize the market, and I think investors that stayed active during this time have been rewarded by staying diversified.

This past year has been an example of why investors really need to look beyond election cycles and instead stay focused on what they’re trying to achieve. Staying objective, diversified, and forward looking towards the next two to three years will help investors avoid getting caught up in short term market hiccups.