The last time there was a contested presidential election, the S&P 500 and tech stocks fell. Can it happen again?
Many Americans wonder how long it will take for the winner of the presidential election to be declared. Fears over a contested election and ballot battles that could end up in court, as well as a president who has not said he will accept the results, could put investors off. This may be especially true with stocks near all-time highs despite so many existing headwinds, including a pandemic and massive job losses and uncertain progress on vaccines and more federal stimulus. And the main technology stocks of the S&P 500 represent up to 20% to 25% of the index in this bull market.
There isn’t much recent precedent for understanding what a prolonged struggle for the US presidency might mean for stocks, but there is at least the Bush vs. Gore electoral battle of 2000. One thing is certain: on the 2000 base, Q4 of a contested US Election year could see a significant increase in volatility.
In 2000, it took five weeks to know the outcome of the presidential race. During this period, recounts and court rulings added to market volatility for the S&P 500, which fell 7.8% between Election Day 2000 and the end of the year.
But it’s a mistake to view the sale of technology as an election event, according to an analysis by DataTrek Research. Concerns about the profitability of the tech sector, interest rate hikes to fight inflation, and the slowing U.S. economy were bigger factors at the time, as big names like Apple and Bank of America disappointed investors with fourth quarter 2000 earnings.
The bursting of the dot-com bubble was the biggest headwind for the S&P 500 in the fourth quarter of 2000. In 2020, it might be best to keep a close eye on another segment of the market during an election contest: the Russell 2000.
In the only recent precedent for a contested election, US small-cap stocks rebounded from market volatility faster than large-cap stocks in the S&P 500.
Small-cap stocks are more focused on the US economy. They are also less exposed to technology than large caps, which mattered a lot in the dot-com bubble. For DataTrek, it also means it’s easier to use small caps to isolate factors in late 2000 and see the impact of a contested presidential run on US stocks.
The Russell outperformed the S&P on Election Day 2000 at the end of the year, down 4.4% from the S&P 500’s decline of 7.8%. And from the December 12 court ruling to year-end, the Russell was up 1.2% and the S&P was down 3.7%.
A new pro-business president has likely helped small caps given their disproportionate exposure to US economic growth relative to large caps. The S&P 500’s gains were also more subdued as the year-end approached than the Russell due to its greater technology weighting and oversight of weak fundamentals for this sector.
Nonetheless, if the outcome of this year’s presidential race is disputed, small caps are an asset class to consider buying during any resulting election-related volatility. According to DataTrek, the latter should come back stronger once the winner becomes evident, especially if Congress passes more fiscal stimulus to help stimulate U.S. consumer spending.
Defensive market bets in 2000
From polling day to the Supreme Court ruling in 2000, defensive sectors and asset classes, like consumer staples and gold, also outperformed. Sectors that are expected to benefit from Republican policies – that is, energy – also recovered until the end of the year.
Republican presidential candidate George W. Bush (left) and Democratic presidential candidate Al Gore speak during their third debate at Washington University in Saint Louis, MO, October 17, 2000.
Tannen Maury | AFP | Getty Images
A contested election creates uncertainty, which can favor more defensive sectors or asset classes until there is a known outcome, but the economic and market environment at the time also plays a role. very important, DataTrek noted. A contested election result between Trump and Biden could favor more defensive play until a winner is known, but likely as a cumulative effect on the current macroeconomic backdrop linked to Covid. In today’s market, it’s renewable energy stocks, not oil and gas stocks, that have exploded since the March trough.
Ultimately, the question is not which stocks – whether tech stocks or stocks – might fall amid election wrangling. These are the stocks to buy after market volatility to get the fastest rebound in the US market.
Think small, according to DataTrek.
“Small caps are expected to outperform a contested 2020 result as they did in 2000, especially if Congress passes more fiscal stimulus to help boost U.S. consumer spending given their disproportionate exposure to the economy. American, ”said Jessica Rabe, co-founder of DataTrek.