Could a Contentious Election Impact Markets?
Just days after the nation endured what was arguably the worst presidential debate in living memory, it was announced that our President and First Lady tested positive for COVID-19. 2020 just can’t seem to level off and fly straight. Public education is a tangled mess, many small businesses are struggling, and it feels like the governors and mayors of the nation have everyone playing a confusing COVID-restrictions game of Simon Says. Miraculously, the stock market continues to hover near an all-time high. Why is that? The answer fills me with optimism.
In April 1942, France had been under Nazi occupation for two years and Germany’s conquest of Europe seemed unstoppable. 24,000 exhausted and starving US troops were trapped and under full attack on the Bataan peninsula of the Philippines’ Luzon island. Four months earlier, our entire Pacific fleet had been decimated at Pearl Harbor.
Any intelligent person could have told you it was a terrible time to invest. Inflation was 17%; sugar, copper, gasoline…rationed; service groups sold war bonds door-to-door. Locally, the Kiona-Benton grange hosted an open public meeting where regional experts spoke about the impending “post-war depression.” Many thought it was a certainty.
Then something unexpected happened: On April 28, the stock market began to surge. By June of the following year it had gained 54%. The war would rage on for three more years, but the market continued strong growth and would average returns of 10.44% per year over the next decade.
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There is an important lesson in these events: Stock prices are not a measure of current circumstances – they are a forecast of future profits. The strong market performance during the height of World War II demonstrated strong optimism in a post-war future. The market was looking beyond the war. Today’s market performance likewise demonstrates that investors are looking beyond the immediate issues of 2020 with a heavy dose of optimism.
You might be thinking, “But it’s different this time!” – and you’d be partially correct. The specific crisis of the moment always seems unique, but there is absolutely nothing unique about crises in general. There’s always going to be a crisis. In the 1920s, it was unsecured debt. In the ‘40s, it was Nazis. In the ‘50s and ‘60s, it was Communism. In the ‘80s, it was widespread bank/savings and loan failures. In the ‘90s, it was the tech bubble; and in the 2000s, it was the housing crisis.
Am I worried about the combined effect on financial markets posed by COVID-19 and a potentially contentious presidential election? The answer is no. There may certainly be short-term volatility tied to these current events, possibly even deep short-lived declines, but I am not concerned they will last. An examination of historical events shows that elections have never had a direct lasting impact on markets – not even the worst elections. The market is looking past the issues of the day and forecasting strong profits in the future. We should follow that lead and keep our eyes on the horizon as well. Chin up!