Why investors shouldn’t bet on the US election winner

The first TV debate between President Trump and his Democratic challenger Joe Biden turned out to be chaoticimago images / UPI Photo

Biden versus Trump: If you believe the American media, the vote on the next US president in early November will be a fateful election. On the one hand there is the incumbent, who flirts with right-wing extremists, gets out of international treaties and does not take the truth very seriously. On the other hand, there is the challenger, who presents himself as the nation’s reconciler and is certainly the more moderate and sociable of the two candidates, but who does not always seem to be spiritually on top.

The obvious differences between Trump and Biden make betting on the election outcome particularly exciting – also in the financial markets. As deeply divided as the USA presents itself, Wall Street could react differently to the victory of one or the other candidate. At least that is the calculation of various investment houses that offer investors products with which they can speculate on the election winner. Such investments may be fun. But they’re not a good idea for several reasons.

Sector baskets with gaps

Election bets for investors are usually based on the premise that a Republican president gives tailwinds to other industries than a Democratic incumbent. Classically, a Republican in the Oval Office is considered beneficial for the banking sector, because the Grand Old Party is not exactly known as a friend of strict regulation. A democratic president, on the other hand, should support the consumer sector thanks to higher social spending, which encourages poorer citizens to shop.

Investors can bet on the election winner by overweighting individual sectors in their portfolios, for example sector ETFs. At the beginning of the year, the Swiss private bank Julius Baer even offered two pre-packed security baskets with which investors could bet on Trump’s re-election or a democratic winner. The Democrats’ basket contained, among other things, bonds linked to US consumer companies. In the Trump basket were papers that were linked to technology and financial companies.

The sector theory, however, has gaps. In addition to politics, there are a multitude of factors that decide whether an industry is doing well – just think of the boost that the Covid 19 pandemic gave technology and biotech companies. In general, investors tend to overestimate the impact the US election will have on Wall Street. This is shown by an investigation by the Sutor Bank.

Choice bets are pure speculation

Experts at the Hamburg-based private bank looked at how the US benchmark index S&P 500 has developed since 1929, depending on who was in charge in Washington. The result: In the period under study, the Republicans appointed the president in 44 years, and the Democrats in 48 years. Under Republican presidents, the US stock market has seen positive performance in 30 years; with Democratic incumbents, it has done well in 37 years. “The effects on the stock market in the wake of the next presidential election are unlikely to be noticeable,” said Sutor Bank.

John Rekenthaler, Research Vice President of the Morningstar fund analysis company, comes to a similar conclusion. He looked at the performance of the Dow Jones during the first three years of office of the last ten US presidents. A preference of investors for one of the two major US parties cannot be inferred from this. The dominant effect is not the party membership of the president, but the time he is in office, says Rekenthaler. George W. Bush, for example, was unlucky that his presidency saw both the decline of technology stocks and the financial crisis of 2008. Bush was hardly to blame for this.

Ultimately, election bets remain pure speculation. That was impressively proven by Trump’s victory in the last election. In the election year 2016, Leonteq, a Swiss structured securities specialist, reported that around 80 percent of betting customers were betting on Hillary Clinton to win. In retrospect, it wasn’t such a good choice.

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