A top Wall Street investment strategist breaks down how to invest heading into an unpredictable US election — and what to do if the outcome is contested
- Business Insider spoke with Sam Stovall, CFRA chief investment strategist, on how to invest during an unpredictable US election season.
- Stovall cautioned investors against trying to "guess" who will win the election, especially given how incorrect the polls were in 2016.
- The chief strategist also said investors could use a contested election and subsequent pullback as a time to buy stocks at a discount.
The upcoming US election is leaving many investors uncertain about how to manage their portfolios. While national polls point to a clear Joe Biden win, many investors are looking back at 2016 and are skeptical of polling. In addition, the surge of mail-in voting has increased the likelihood that the outcome of the election may be unknown for a while after November 3.
Business Insider spoke with Sam Stovall, CFRA chief investment strategist, to discuss how investors should position their portfolios during this unpredictable election season.
Stovall cautioned investors against trying to "guess" who will win the election and making investment decisions based on that projection.
"You're taking a big gamble being wrongly positioned should 2020 end up looking like 2016, in which the polls were wrong," the investment strategist said.
Instead, investors should stick with their strategy no matter who they think will win, or who actually ends up winning. CFRA is neutral on both stocks and bonds.
"If you have a strategy, then stick to that strategy no matter who ends up becoming president or whom you think will become president," Stovall said. "If you're a momentum player, stick with momentum."
The coronavirus has also complicated prediction models that typically provide investors with a clearer idea of who will win. Stovall referenced the Presidential Predictor model, which tracks the S&P 500 price change from July 31 to October 31 before the election. Since 1944, the model has shown that if the price change was positive, the incumbent political party will remain in office.
This model has failed only twice, during years when the US faced what Stovall calls "geopolitical disruptors" — the Vietnam War and the Iranian Hostage crisis. He said coronavirus could be the 2020 "disruptor" that explains why Trump may not win reelection, even if the S&P 500 price change is positive heading into the election.
If the election is contested and the outcome is uncertain for a few weeks, Stovall expects there to be a pullback in stocks. In 2000, the market fell 10% as it awaited the election decision, he said.
However, this pullback could provide an opportunity to buy at a discount stocks that have heated up recently, like alternative fuels and cannabis.
"Look for those stocks that got away from you during the recent recouping of the prior bear market. And identify which ones you would like to own at lower prices," said the strategist. "Then, once they hit your target price, act upon it because you're never really going to be able to capture the ultimate bottom."
Stovall also said an additional selloff is likely if Biden wins, as investors take some profits in anticipation of the former vice president's capital-gains tax hike.
Ultimately, investors should remember that the market is forward looking, and is more focused on economics than politics, he said.
Monday's stock selloff was likely due to the worry that the surge in coronavirus cases could lower fourth quarter gross domestic product and earnings, said Stovall. Thursday's reported third quarter GDP growth is estimated to be 31%, and the market may react negatively if the number is lower.
"Because the estimate is so high, I actually think all things being equal, you have a greater chance of being disappointed than that you are being overly pleased," Stovall said.