As coronavirus cases across the world surge and a presidential election looms on the horizon, some investors may need to reassess their strategies
It’s been a wild ride these past 6 months, largely due to the small matters of a global pandemic, the longest bull market in history being replaced by the shortest bear market, and topped with civil unrest.
Throughout that time, almost everything we thought we knew about the stock market has been turned on its head: Zoom (NASDAQ: ZM), Netflix (NASDAQ: NFLX), Teladoc (NASDAQ: TDOC) and a number of other at-home stocks have seen themselves reign supreme while Big Tech fell to the sidelines. However, FAAMG then made a news headline comeback, and suddenly the tech-heavy Nasdaq (NYSEARCA: QQQ) is pulling away from its Dow Jones (NYSEARCA: DIA) and S&P 500 (NYSEARCA: VOO) counterparts. This jump is boosted by the traditional giants, Facebook (NASDAQ: FB), Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), and Google (NASDAQ: GOOG).
However, storm clouds are gathering on the horizon — despite an incredible market rebound since March — and with a rise in coronavirus cases and a presidential election around the corner, this optimism could all come crashing down.
The market is vulnerable right now
It is hard to recall a more volatile time in the market as a whole. This is because there appears to be a shift in investor logic, with sentiment turning extremely bullish on ‘easy bargains’ and a rise in day trading. This logic has led to companies such as Hertz (NYSE: HTZ) and Chesapeake Energy (NYSE: CHK) soaring and collapsing mere days before each declared bankruptcy. Meanwhile, the best course of action appears to be a contrarian one, with leaders such as Berkshire Hathaway (NYSE: BRK.B) CEO Warren Buffett opting to sell vulnerable airline stocks — such as Delta (NYSE: DAL) — and hold off on heavy investments.
Another worrying sign is the fact that insider buying has ground to a halt, which may be due to it being the height of earnings season, but the rates are still lower than usual.
Of course, the elephant in the room is the rising cases of COVID-19 which is hitting record levels across the U.S. and Latin America. This ‘second wave’ of sorts is leading many analysts to fear that a second lockdown could come into effect should the body count continue to rise.
And aside from it being a seasonably weak time of year for the market anyway — July through October – there is the small matter of the presidential elections which are fast approaching in November. Though the polls are beginning to show favorable figures for Democratic nominee Joe Biden, regardless of the election outcome, it will likely have a large impact on the market.
Will presidential elections affect the market?
According to research conducted by The Balance, a presidential election has historically been very good for the market. They found that the market racked up positive returns in 19 of the last 23 election years from 1928-2016, meaning that there were just 4 years where a presidential election coincided with a down year for the market. Interestingly, the last time the market went down in an election year was with the first election of Barack Obama in 2008. The market had been obliterated by the unfolding Financial Crisis in the run-up to the November polling date, with the S&P 500 down close to 30% in the six months ahead of the election. However, we then entered the longest ever market bull run.
Of course, 2020 has been no normal year and whether President Trump remains in office or Joe Biden wins the election, there will be volatility. Biden’s opposition to Big Tech and calls to break it up could cause a ripple effect that will run through the tech-heavy U.S. market, but the reality of the situation is that there is no way to predict what could happen.
Can you protect yourself?
1. Get started: No matter how big or small the investment.
2. Think long-term: The buy and hold philosophy will outperform the market in the long-term.
3. Never borrow to buy: Save first, then invest.
4. Diversify: Accumulate a minimum of 12 stocks across 6 different sectors.
5. Buy what you believe: Own part of a business you love.
6. Invest What You Can, When You Can: Get your saving habits right.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in stocks mentioned above. Read our full disclosure policy here.