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Expect an Election Overreaction

Jeff Remsburg
·6 mins read

An inability to pass another stimulus bill puts the election in the spotlight … what history tells us about the White House’s impact on markets … how our technical experts are viewing opportunities

Unemployment numbers remain persistently high.

On Thursday, we learned that last week’s unemployment claims fell slightly to 840,000.

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For context, weekly jobless claims are down significantly from their recent peak of nearly 7 million in March. More recently, they’ve been coming in between 800,000 and 900,000.

These numbers are higher than in any previous recession for records dating back to 1967.

With so many unemployed, the status of federal stimulus dollars takes on added significance.

Federal Reserve Chairman, Jerome Powell, made this point in his comments when speaking at a virtual conference of private-sector economists on Tuesday:

At this early stage, I would argue that the risks of policy intervention are still asymmetric. Too little support would lead to a weak recovery, creating unnecessary hardship.

The extent to which Wall Street is eager for stimulus was on full display later that day after Powell’s comments, as well as Wednesday.

Tweets from President Trump on Tuesday afternoon dashed hopes for more stimulus, prompting a 400-point collapse in the Dow … only to be followed by a pro-stimulus tweet that led to a market surge on Wednesday.

Simply put, for the moment, the market is fixated on more stimulus dollars.

Unfortunately, as it appears now, a meaningful stimulus package will be difficult to accomplish until after the election.

For more on the significance of this, let’s turn to our technical experts, John Jagerson and Wade Hansen, editors of Strategic Trader.

From their Wednesday update:

At this point, we still consider progress on stimulus to be the most important X-factor facing the market and we aren’t ready to say it can’t happen in the short term.

Unfortunately, the drama in Washington D.C. will probably continue overshadowing third-quarter earnings, so for now, we will have to wait to see how this plays out.

This has put the focus on the election in a new way, and we have been getting a lot of questions about the longer-term impact it is likely to have on the market and whether there are any short-term opportunities to profit.

Given this set-up, in their update, John and Wade examined historical presidential elections and their impact on the investment markets. As you’ll see, an initial overreaction often sets up an opportunity for profits.

Today, let’s get ready to take advantage if such an overreaction occurs.


***The interplay between the stock market and U.S. presidents

For newer Digest readers, John and Wade are the analysts behind Strategic Trader.

In their service, they combine options, insightful fundamental and technical analysis, and market history to trade the markets, whether they’re up, down, or sideways.

An awareness of market history is especially helpful for anxious investors in moments like these.

Given the heightened emotions around this election, with each side fearing a loss, what does history tell us about market performance under the different political regimes?

From John and Wade:

It seems very unlikely to most economists that the president (or their party) has very much influence over the actual returns of the market. Although we are sure they wish that they did.

In the table below you can see some examples of the best and worst terms just to see how diverse those extremes are by president and party.

This illustration is not to make a case in favor of Biden or Trump. Instead, we hope you found the data somewhat surprising.

Most investors tend to make bad estimates about the president’s party and market returns and that leads them to make bad assumptions about the market following elections.

John and Wade point toward the night President Trump won the election in 2016 as the best recent example.

You may recall how Dow Jones Index futures dropped 750 points upon Trump’s victory. There was a tremendous outcry of gloom and doom from the anti-Trump camp.

Yet, markets pivoted sharply, which gave bulls a fantastic short-term opportunity.

Back to John and Wade:

This is not a unique issue to the 2016 election.

It’s actually very common and that gives us an edge.


***The coming overreaction to the election

John and Wade believe that regardless of whether President Trump or Joe Biden is elected, traders are likely going to overreact.

If that happens, investors can take advantage by taking one, simple step …

Invest in the opposite direction.

From John and Wade:

The overreaction is most likely based on the tendency for traders to “sell the news” and overshoot a correction.

The historical data seems to point towards a likely positive outcome regardless of which party controls the White House.

We suspect that we may get some feedback from readers about the dire consequences of a “socialist, liar, swamp-dwelling career politician, bankrupt mogul, etc.” being elected (or re-elected).

We have heard the same thing for each election and we will continue to bet on Americans to use innovation, industry, cooperation and hard work to continue pushing the economy forward regardless of who wins.

So far, putting our faith in the American people has played out well.

On that note, we’ll remind readers of similar advice from Louis Navellier:

If you’re worried about the presidential election having a lasting negative impact on your portfolio, don’t be.

Sure, it might get a little bumpy, but the long-term trend for the stock market continues to point up.

Instead, now is the time to focus on which stocks you should be investing in.

As for Matt McCall, I’m not even certain that a contested election-result that drags on for weeks could dampen his bullishness. After all, Matt has labeled the decade we’ve just begun as “The Roaring 2020s.”

From this perspective, whatever market weakness might accompany the presidential election is actually a sale. It’s a chance to buy world-class stocks at levels that will likely appear downright cheap as we look in the rearview mirror later this decade.

As we wrap up, regardless of who takes the White House, we should bank on an exaggerated market reaction. But for investors with cooler heads, John and Wade believe this will present a good short-term trading opportunity.

Back to John and Wade:

… elections tend to have a moderate long-term impact on the market but also create interesting short-term profit opportunities when traders overreact.

We will keep you updated on our plans to take advantage of that as election day nears.

Have a good evening,

Jeff Remsburg

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