Involved about controversial elections? Here is what went down in shares throughout the Bush-Gore Battle of 2000

In the last hotly contested presidential election, the S&P 500 and tech stocks fueled. Can it happen again

Many Americans wonder how long it will be before the winner of the presidential election is announced. Fears of a competitive election and ballot fights that could end up in court, as well as a president who hasn’t said he will accept the results, could unsettle investors. This is especially true for stocks that are hitting near all-time highs despite so many headwinds existing, including a pandemic and massive job losses, as well as uncertain advances on vaccines and other federal incentives. And the top tech stocks in the S&P 500 make up 20-25% of the index in this bull market.

There’s not much recent precedent to understanding what a prolonged US presidency fight could mean for stocks, but at least there is the Bush-Gore election campaign in 2000. One thing is for sure: Based on 2000, Q4 of a competitive US election year could see a sharp rise in volatility.

In 2000, it took five weeks to hear the results of the presidential race. During this period, there were recounts and court rulings that contributed to the S&P 500’s market volatility, which decreased 7.8% from election day 2000 to year-end.

However, according to an analysis by DataTrek Research, viewing the tech sell-off as an election event is a mistake. Concerns about tech profitability, interest rate hikes to fight inflation, and a slowing US economy were larger factors at the time as big names like Apple and Bank of America disappointed investors on earnings in the fourth quarter of 2000.

The bursting of the dot-com bubble was the biggest headwind for the S&P 500 in the fourth quarter of 2000. In 2020, it may be better to keep a close watch on another segment of the market in a competitive legislature: the Russell 2000.

As the only precedent for a controversial choice, U.S. small-cap stocks recovered from market volatility faster than large-cap stocks in the S&P 500.

DataTrek Research

Small-cap stocks are more focused on the US economy. They are also less technically exposed than large caps, which is of great importance for the dotcom bubble. For DataTrek, it also means it’s easier to use small caps to isolate factors in late 2000 and assess the impact a competitive presidential race will have on US stocks.

The Russell outperformed the S&P from Election Day 2000 to year-end, down 4.4% versus a 7.8% decline in the S&P 500. From the court’s decision on December 12 to year-end, the Russell was up 1.2% and the S&P was up 3.7%.

A business-friendly president likely helped small caps as they had an oversized exposure to US economic growth compared to large caps. The S&P 500’s earnings were also more subdued than the Russell at the end of the year due to the higher technical weighting and the overhang of weak fundamentals for the sector.

If the outcome of this year’s presidential contest is controversial, small caps are an asset class to consider in the event of ensuing election volatility. The latter should snap back harder once the winner is revealed, according to DataTrek, especially if Congress passes more fiscal incentives to boost US consumer spending.

Defensive market bets in 2000

From election day to the Supreme Court ruling in 2000, defensive sectors and asset classes such as consumer staples and gold also outperformed. The sectors that are supposed to benefit from Republican policies – ie energy policy – also rallied towards the end of the year.

A controversial choice creates uncertainty that can favor more defensive sectors or asset classes until a known outcome is known, but the economic and free market background also plays a huge role at this point, according to DataTrek. An election result challenged by Trump versus Biden could favor more defensive games until a winner is known, but likely as a compounding effect on the current macroeconomic backdrop on Covid. In the current market, it is renewable energy stocks, not oil and gas stocks, that have boomed since the low in March.

In the end, the question is not which stocks – whether tech stocks or any stocks – could fuel up during the election campaigns. It’s what stocks need to buy after market volatility takes its toll to get the fastest rebound in the US market.

Think small according to DataTrek.

“Small caps should outperform the controversial 2020 result like they did in 2000, especially if, given their oversized exposure to the US economy, Congress puts more fiscal incentives in place to boost US consumer spending,” said Jessica Rabe, co-founder of DataTrek.

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