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Election 2020: Markets hate uncertainty, but this week they rose anyway — here's why

Markets are up this week with political uncertainty high. Politics is just one piece of the puzzle.

Election workers count ballots on November 04, 2020 in Philadelphia, Pennsylvania.
Spencer Platt | Getty Images

Typically, the markets don't like uncertainty. But while Americans nervously wait for votes to be counted in the presidential election, the market has rallied. The three major indexes saw their best weekly gains since April, and had their best election week performance in decades.

Don't read too much into it. People sometimes overplay the election as a driver of the economic market cycle, says CNBC Senior Markets Commentator Michael Santoli. But there are too many factors at play to reduce your investment decisions to who is in the Oval Office: "The average person should not place policy expectations at the center of their investment plan."

Here's why the market has been buoyant this week despite political uncertainty.

Traders are looking ahead to 2021

While the market might seem to be reacting to news in real time like a car's speedometer, it in fact is looking 3 to 6 months to the future — to a time when the presidential race will be settled.

You may recall a similar dynamic from earlier this year, when the market rose in late spring even as the government released grim economic data. Traders had already been anticipating that effect months before, Santoli told Grow. Back in February and March, he explained, "the market rushed to price in the expected economic damage, falling about as much as stocks have in a typical recession."  

In the case of the election, traders were weighing that uncertainty months ago, which contributed to volatility in September and October.

The average person should not place policy expectations at the center of their investment plan.
Michael Santoli
CNBC Senior Markets Commentator

A divided government could boost stocks

While the market is looking ahead, some of its reaction is based on outcomes of the vote count. Notably, until Tuesday, the markets seemed to be "positioning for the blue wave scenario," says Santoli.

Traders assume that if the Democrats were to control the Oval Office, Senate, and House, he says, a heavy stimulus package and other progressive policies would favor value stocks over growth stocks. However, as election returns started coming in Tuesday that indicated Republicans could retain control of the Senate while the House would be led only narrowly by Democrats, tech-heavy growth stocks rallied.

"Markets like a divided government," explains Santoli, because in our democracy, "radical policy changes can't happen without consensus." A divided government "creates more incremental economic and fiscal policies."

How to plan for stock market downturns

Video by Stephen Parkhurst

Covid outweighs politics for affecting market behavior

Normally, presidential elections move the market. But this year, traders have been more concerned with the pandemic. "The depths of the Covid pandemic this spring took a huge toll not just on the economy, but overall sentiment as well," says Dominic Chu, senior markets correspondent for CNBC.

As states began to reopen, he says, "for many investors, there was almost a psychological need to accentuate the positive, and find a reason to be constructive on the future of the economy. That mentality is part of the reason for the market surge since March and April."

Big Tech played a big role, too

Another factor contributing to market positivity, says Chu, "has to do with the simple fact that just a handful of stocks control the fate of the overall market." Namely, big tech, and more specifically, Facebook, Apple, Amazon, Google parent company Alphabet, and Microsoft.

"Together, just those five stocks make up nearly a quarter of the overall index," he says. So it stands to reason that the recent Big Tech rally would drive up the overall S&P.

Bottom line: The market doesn't care who is in the Oval Office

Historically, the market has favored incumbents in the short term, performing better in the first year following reelection.

It goes back to the idea that markets hate uncertainty, Ryan Detrick, chief market strategist at LPL, recently told Grow. "When you have the same person who was just in office, you have a good clue of what their policies are and what they're going to do."

Even so, markets tend to go up over the duration of a president's term no matter which party holds the Oval Office. In fact, since President Harry Truman's terms (1945-1953), all U.S. presidents left office with the S&P higher than it had been when they began, with only two exceptions — Richard Nixon and George W. Bush.

That's why financial planners advise keeping an eye on the long game.

"Focus on your goal," advises Neal Solomon, a certified financial planner and managing director of WealthPro, based in Gloversville, New York. "Democrat and Republican administrations will trade hands many times. It's more important to focus on diversification, and not let the daily news distract you from the long term. There will always be daily news."

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