Trading on the U.S. election

The U.S. presidency doesn’t significantly impact the stock market, a CIBC portfolio manager says, but overreactions to an election’s outcome present buying opportunities.

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Craig Jerusalim, senior portfolio manager at CIBC Asset Management, said a lot of investors are asking what a Democratic win in the Nov. 3 election would mean for stocks versus a second term for Donald Trump.

Democratic candidate Joe Biden leads Trump by around seven percentage points in national polls, and some analysts say the Democrats are within striking distance of winning the Senate as well as the House of Representatives and the presidency.

In an interview last month, Jerusalim said he researched the relationship between stock markets and the presidency following Trump’s surprise win in 2016. Markets tanked overnight as the world absorbed the news of Trump’s election but quickly recovered on promises for tax relief, infrastructure spending and deregulation.

“The conclusion I came to was that the presidency is largely uncorrelated to stock market returns,” he said. “In fact, the results are often counterintuitive.”

Many expected weak returns during Barack Obama’s presidency, but his eight years in the White House “delivered an impressive cumulative return,” Jerusalim said. The opposite was true during George W. Bush’s two terms.

“There will likely be overreactions in specific sectors, such as technology or healthcare post-election. But those overreactions are what create investment opportunities,” he said

Even the prospect of higher corporate taxes will likely be balanced by the TINA effect: the belief that “there is no alternative” to buying equities with interest rates set to remain low for years.

Renewable energy businesses are likely to benefit under the Democrats, Jerusalim said, but the long-term investment case for the sector is strong regardless.

“Pipelines remain contentious and new pipelines will continue to be a challenge to install, but that likely inflates the value of existing infrastructure in place,” he said.

While the person occupying the White House may not have a major effect on markets, not knowing who the current resident should be would likely create volatility.

A CIBC report last month raised the prospect of a drawn-out legal battle after Nov. 3 to determine the election winner. S&P 500 contracts show markets are anticipating volatility in both the lead-up to the vote and once the result is announced.

“[B]uying downside protection might not yet be too expensive given what’s at stake, and how far markets have come,” the report said.

Option contracts on baskets of U.S. and Canadian energy stocks haven’t priced in election volatility, despite significant policy differences between Trump and Biden on climate change and energy, the authors wrote.

“That might be fertile ground in which to take cover from a 2020 October surprise,” the report said.

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