Still Too Early To Invest For Election

For the last 12 months, we’ve argued that it was premature to make portfolio changes based on one’s outlook for the US election. That advice remains unchanged. While the race is over two months away, the outcome remains too close to call, and the implications are too diverse to make significant portfolio shifts.

In 2020, we outlined a simple three-question framework for evaluating potential outcomes of events like elections:

• What is the likelihood of the event?
• How impactful might the event be?
• Are there other dynamics that might influence the event?

We look forward to hosting our own version of a presidential election debate on October 10th, in which we will discuss the potential ramifications of each major party’s proposals. We promise it will be fact-checked, bi-partisan, and insult-free. We hosted a similar event in 2020 entitled “The Debate You Wished You’d Seen.” While the candidates could surprise us in their upcoming match-up, we’re reasonably confident our previous title will be applicable to 2024. We hope you’ll submit questions and join us.

In this month’s blog, we’re focused on the question of likelihood. We find this to be the most significant of our three questions this time around, saving us from becoming overly ebullient or downtrodden in what many expect to be a binary outcome for the economy or the world at large. It forces us to step back and ask, dispassionately, “How many things have to go right/wrong for a particular outcome to occur?”

No Clear Outcome Today

Landslide elections are increasingly rare. No candidate has won the popular vote by more than 10% since Ronald Reagan in 1984. In two of the last six elections, the winner of the electoral vote actually lost the popular vote. It’s hard to argue that any of these past winners have come to office with a clear mandate.

There are few signs that the 2024 election will be different.  Statisticians, pollsters, and betting markets all suggest the race is competitive, with roughly 50/50 odds between Former President Trump and Vice President Harris. Thus, the odds of a good/bad outcome are essentially a coin toss.

Source: Polymarket

And with polls this close, the election is especially susceptible to normally insignificant factors. For example, at the margin, voters are more likely to vote for incumbents when their local sports teams are winning. They’re also more probable to turn out to vote when the sun is shining than during a rainstorm. That’s to say nothing of the chance that an election-changing event can happen in the last 60 days of a campaign. Indeed, in just the last two months, we’ve witnessed an assassination attempt on one candidate and the bowing out of another. Trying to forecast (and invest around) such an uncertainy is a fool’s errand, in our opinion.

Even If One Knew the Winner, They Might Not Know the Policy

Of course, it’s highly unlikely that the winner will be able to enact most of their campaign promises. For most major initiatives, the White House must work with Congress, which controls the budget. Here, too, the odds favor moderation. As of the end of August, betting odds suggest that the Republicans have a less than one-in-three chance of sweeping the Presidency and both chambers of Congress, while Democrats have a less-than one-in-four chance.

Source: Polymarket

Pushing through major legislative changes can prove challenging even when a party sweeps both chambers and the White House. For example, Former President Trump was unable to fully repeal the Affordable Care Act (a/k/a Obamacare) despite a Red Surge in 2016, and while President Biden sought to raise revenues by repealing the Tax Cut and Jobs Act on “day one,” the law remains despite the Blue Wave of 2020.

Indeed, most campaign promises fail to make it through as initially advertised. The non-partisan fact-checking website Politifact has tracked the follow through of campaign promises for the last three Presidents. President Obama had the best record of just under 50% of promises kept (though we note he had eight years to govern, whereas Biden and Trump had only four.) We also acknowledge that while Biden still has a few more months before the time runs out on the outstanding “stalled” and “in the works” categories, although, in our view, it’s unlikely that his “promise kept” ratio will increase dramatically.

Source: Politifact

What’s This Mean for Investors?

When we evaluate various combinations of past governments, the record shows that investors are rewarded for remaining steadfast despite the political noise. Returns were positive regardless of the makeup of the federal government.

Source: Data gathered from the historical governing record and S&P 500 calendar year returns from 1933-2023.

As our Vice-Chair-Emeritus John Vogelstein is fond of saying, “I’ve met very few rich pessimists.” Certainly, the government has had its fair share of bad policy over the last 248 years, yet the United States consistently ranks as one of the best places to do business globally. There may be relative winners and losers in any given policy environment. Nevertheless, we remain optimistic that well-run companies that lead innovation and fill societal needs will persevere – no matter the odds of who wins in November.