Let the mudslinging begin! Nov. 3, election day, is fast approaching. Whether you're left, right, or center-leaning in your political views, one thing is certain – you will see plenty of ads urging you to vote.
Despite the usual push to get Americans to their polling stations or mail-in ballots, the United States is pretty poor in terms of voter participation compared to the rest of the world. That's right – U.S. voter turnout is extremely low compared to other developed countries.
Barely half – just 53.6% – of Americans voted in 2012. That puts the United States 31st out of 35 Organisation for Economic Co-operation and Development (OECD) nations. For context, Belgium was number one in 2014 with 87.2% of Belgian citizens voting. And to step it up a notch, Australia requires voting by law. If you don't vote as an Australian citizen, you get fined.
So, consider this as we get closer – if you don't vote, you can't complain about the outcome. To help you choose, the rhetoric is intensifying on each side. And as we all know, it can get nasty. So, buckle up for a volatile and contentious battle down to the wire.
What does it mean for markets? Intuitively, uncertainty means volatility for investments. How does each party's policy contribute or harm a specific business? Industry? Taxes? And so on …
I've heard how September is typically a weak month for markets. It happens to be true. The SPDR S&P 500 ETF Trust (SPY) is down 4.96% this month so far. That’s quite a reversal from July and August with massive gains of 5.89% and 6.98%, respectively. But remember, when the animal spirits howled, we saw huge exchange-trade fund (ETF) buying. And I told you that was my tipoff that markets were likely to get unsettling.
The month began with a reckoning in technology and then energy stocks. Last week saw healthy buying in materials, discretionary, industrials, and health care, but selling intensified in utilities and staples.
There is volatility under the surface. Despite the timely signals of froth foreshadowing chop, September weakness was to be expected. The average SPY return for the month of September since 1990 is -0.34%.
But what about election-year Septembers? If we drill down, election years since 1990 performed even worse, returning -0.85%. Election-year Septembers are actually between 2.5 and 3.5 times worse performers than non-election-year Septembers since 1990.
But why? Well, we can actually see the reason – big money investors don't like uncertainty. So, they typically shed risk headed into elections.
The MAPsignals Big Money Index tracks huge investment capital moving in and out of stocks. The index falls as selling rises and rises as buying increases. Usually, the trend is your friend, and especially as an investor – you don't want to fight the trend. The trend in the Big Money Index right now is down.
It turns out that election years tend to see a falling Big Money Index heading into the election and a rising Big Money Index after. Simply put, stocks get sold into the uncertainty of an election day and get bought soon after.
We will address all elections since 1990 in a larger study soon, but here are the three prior elections. Each vertical blue line is the day of the election.
2008 Big Money Index
2012 Big Money Index
2016 Big Money Index
Notice how the yellow line plummets before and rises after the blue line? Each time, that was big money fleeing from stocks before election day. Then once it was known who won the presidential election, they plowed back into stocks. Is the former happening now? You tell me.
2020 Big Money Index
Now it certainly looks eerily similar to prior three elections, doesn't it? I can also tell you that the pattern revealed itself in nearly all other presidential elections since 1990.
That is why I believe a great setup is ahead for stocks:
- We have a historically weak month of September for stocks.
- We are in an election year, making this September likely worse than non-election years.
- We have big money historically trying to side-step political uncertainty
- And we will likely have the relief buying that typically happens after election day.
If history is any guide, start making your buy lists now. It's a good time to have cash. Isolating outlier stocks that have fallen victim to risk reduction due to an election are a great way to cherry pick. Let the political worry of others become your investment confidence.
Look for strong stocks with great businesses, strong sales and earnings growth, big profits, low debt, and a strong history of big money buying. When those stocks go on sale (because of the unknown risks seen by big professional money managers), that's opportunity knocking. We have history suggesting that they'll get back in after we know who wins.
As for who does win on Nov. 3? I'll leave that debate for virtual cocktail parties and the talking heads on network news.
Gore Vidal said: "Half of the American people have never read a newspaper. Half never voted for president. One hopes it is the same half." I will cast my vote in an effort to bolster the weak global standing of U.S. voter attendance. Beyond that, I only need to focus on the hidden winners that will come from election day.
Outlier stocks on sale are gifts handed to us by the volatility of political uncertainty. History suggests that we should be ready with our lists. I am. Are you?
The Bottom Line
We (MAPsignals) are bullish on high-quality U.S. equities in the long term, and we see market pullbacks as areas to pick up great companies.
Disclosure: The author holds a no positions in the securities mentioned at the time of publication.