The title misappropriates the verse from the famous English folk verse. It references the ‘Gunpowder plot’ also known as Guy Fawkes Day, when a revolutionary threatened to blow up London’s houses of Parliament and assassinate King James I. (The American cultural reference here would be the movie ‘V for Vendetta’).
While the 5th of November was a culmination of a clash between the Catholic and Anglican movements, the major showdown of our own time lies between Republicans and Democrats on the 3rd of November and it may present some fireworks of its own.
Now whether you see Biden/Harris (Fawkes) taking on the Trump (King James) or vice versa, I always aim to remain apolitical in my approach to markets. The question is what it matters to you and what does it mean for your portfolio and risks in the short and longer term.
I mapped US elections since Eisenhower to try and reflect whether there is any bearing on either the market or economy’s performance. The table below summarizes some key metrics.
Source: Moe-Knows, Forbes, IMF, NBER, Dimensional
My takeaway from this as well as reading research put out by the Fed of St Louis and other sources reveals the following:
- Little correlation between Democrat/Republican administration and market performance
- Market performance preceding election has a material bearing on subsequent performance
Some analysts do note that the average return during Democrat administrations tend to exceed Republicans although in my view, this ignores point 2 above, the path dependencies of markets and the economy. Was the market at the end of a long cyclical bull run or was it exiting a large-scale bear market or crisis at the time of the election was often a driving factor.
What about the candidates policy stance on taxes or regulation?
The natural retort is that surely, each candidates’ policy stance and subsequent positioning on issues like taxes should have a bearing? Well, data shows us that there is little correlation let alone causation between tax burdens or levels and the S&P and little correlation between the regulatory stance and the S&P.
The charts below from Path Financial LLC and the St Louis Fed are telling. Over the long term, the market appears truly agnostic to who wins the White House, what their tax stance is and whether they favor regulation.
So what does a seemingly agnostic market mean? Well, in short, its why history is not always a cut and paste away and that one must think deeply about one’s own investment strategy and profile. There are no guarantees. Mainstream media outlets will have you believe ‘Biden Good, Trump Bad’ or vice versa depending on their political leanings when in fact the truth is more nuanced.
If one is making long term investment decisions (not to be confused with trading decisions) based on binary outcomes and using post-factual indicators and data, there is bound to be pain. Why do I say this? Well, who can forget how wrong the polls were during the Clinton/Trump standoff? Yet the same polls are being used to inform expectations of the current election. Superimpose ‘beliefs’ of who is good or bad based on perceived policy stance and you can see the problem.
“He who knows not,
and knows not that he knows not,
is a fool; shun him.”
For what it’s worth, Biden is leading in the polls right now. So what?:
Investment strategy (long term) vs. trading strategy (short term):
Rather than picking the winner, I am genuinely concerned about what the win or loss looks like. America is currently fractured ideologically, culturally and these cracks (long term) are but manifestations of many deeper issues which will undoubtedly be the subject of future posts.
If Trump loses (as the unreliable polls suggest), will he contest the outcome? He famously asked his right-wing supporters to ‘Stand back and Standby’. Standby for what? Will he go to the courts for redress and how long will that take? Markets DISLIKE uncertainty.
Such uncertainty poses material short term risks both to the upside and downside. In the short term, volatility will rule. The VIX (volatility index) has already risen to close to 40 despite markets remaining elevated. This is unusual as VIX usually declines with market rallies.
Risks of civil unrest remain high regardless of a Trump or Biden victory as the fractures in the US soul remain wide and deepen. Right-wingers on the one hand and Antifa supporters on the other make for a toxic mix, the result of years of partisan polarization. All this ensures that the short term will be volatile. Make sure that your risk tolerance matches your risk profile.
What matters in the long run?
The world is drowning in debt. The key difference is that the US has the exorbitant privilege of being able to print the world’s reserve currency, the mighty US dollar. Is its place secure?
The US has been the world’s only superpower in living memory. Therefore its recession from its geopolitical throne of global hegemony is all the more concerning. What or who replaces what has been a unipolar world for so long?
Before COVID, MMT (Modern Monetary Theory) was all the rage among the ‘lefties’ but in a post COVID world, the mass monetization of government debt to fund stimulus checks directly into the economy means that we are all part of MMT now.
All of this is concerns me more than the immediate outcome of the US election. These are the real macro questions we should be focusing on regardless of who occupies the White House. Undoubtedly, the US President may aid or hinder any of the trends identified above but in creating wealth, we need to think bigger, and these changes afoot may be multi-generational in nature.
So reflect, review and revise your approach to your investments…manage your risk as its likely to stay bumpy. And remember that Guy Fawkes failed to blow up London’s parliament and assassinate the King. The King lived on; Fawkes was executed but that did stop him becoming an icon to future revolutionaries. Lets make sure our portfolios don’t go up in flames!
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The Fifth of November – The Guy Fawkes Poem
The fifth of November,
The Gunpowder treason and plot;
I know of no reason
Why the Gunpowder treason
Should ever be forgot!
Guy Fawkes and his companions
Did the scheme contrive,
To blow the King and Parliament
All up alive.
Threescore barrels, laid below,
To prove old England’s overthrow.
But, by God’s providence, him they catch,
With a dark lantern, lighting a match!
A stick and a stake
For King James’s sake!
If you won’t give me one,
I’ll take two,
The better for me,
And the worse for you.
A rope, a rope, to hang the Pope,
A penn’orth of cheese to choke him,
A pint of beer to wash it down,
And a jolly good fire to burn him.
Holloa, boys! holloa, boys! make the bells ring!
Holloa, boys! holloa boys! God save the King!
Hip, hip, hooor-r-r-ray!
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Great piece of work Mohammed. I will hang on to my investment portfolio irrespective of the WINNER. SHUKRAN MO
Mohammed Yaseen Nalla
Thanks for reaching out Bilal and sharing what your thoughts are on the outcome. Please bear in mind that we do not offer advice but merely our perspectives on markets… Please continue to let us know your thoughts on posts as well as your views.