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Should a U.S. Election Affect Your Asset Mix?

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Should a U.S. Election Affect Your Asset Mix?

Should an Election Affect Your Asset Mix?

U.S. elections are a powerful force in investor psychology.

In fact, historically, investors pour more money into low-risk assets than equity investments surrounding election season. Following election years, investors reverse course and put their money back into equities.

This Markets in a Minute chart from New York Life Investments shows how investors have reacted to U.S. presidential elections over time, and why maintaining your long-term asset mix may be a better course of action.

Market Behavior During U.S. Elections

While investors allocated funds into safe assets in election years, what happened to the market?

 Average S&P 500 Returns in Presidential Election Years (1928-2016)
New president is elected9.3%
Incumbent president win13.4%
All election years11.3%

Source: Morningstar (Dec, 2019)

On average, the market has returned 11.3% in election years over the last century.

Markets also appear to prefer familiarity—when the incumbent president won, the S&P 500 averaged higher returns. Alongside this, it made no difference if a Democrat or Republican candidate won.

Implications for the 2020 Election

Still, with mail-in voting controversy and the anticipation of a results dispute, the 2020 presidential run has stoked greater volatility in financial markets. What reference point can we make to previously contested results?

Following the 2000 results between Al Gore and George Bush, investor fear ran rampant. Markets fell 1.6% when no winner was clearly determined. Compare this to the 2016 presidential run, when markets jumped 1% the day after the election.

But while short-term impacts of U.S. elections cause heightened uncertainty, it’s important to analyze if it’s an emotional or rational decision being made in response to market unrest.

Opportunity Costs

While investors typically run to safe-haven assets during these cycles, the table below illustrates how this may be less optimal for their portfolios.

 U.S. Treasury Bill (T-Bill) Rates
8 Week T-bill0.09%
26 Week T-bill0.11%
52 Week T-bill0.13%

Source: U.S. Treasury (Dec, 2020)

Instead of paying attention to unknown variables inherent in every market, investors can focus on what the numbers are saying.

Building a Resilient Portfolio

So how can investors stay the course during election season?

Broad historical trends show that in spite of unique events, money in the stock market positively increases over time. Staying invested in your long-term asset mix can help capture these overarching trends.

One-off events such as an election provide an opportunity to take advantage of temporarily lower prices. This, coupled with the higher volatility levels that accompany election cycles, offer an avenue for your portfolio to be more resilient as it helps strengthen portfolio returns.

The diminishing returns of cash compound this effect. Over the last decade, cash returned close to 0%. These return rates could fall even lower in the years ahead as interest rates decline.

In short, it’s impossible to predict the future. Instead, equities and other fixed income investments have offered a number of advantages. Macroeconomic factors, such as falling interest rates and the supply of capital, have only highlighted this trend.

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Markets in a Minute

Visualizing Interest Rates by Country in 2021

Are short-term interest rates rising or falling around the world? In this infographic we show interest rates by country in 2021.

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Interest Rates by Country

Visualizing Interest Rates by Country in 2021

Going as far back as the 14th century, pandemics have been found to have a negative effect on interest rates.

History shows that this effect is even greater than that of financial crises. Across a study of 19 pandemics since the mid-1300s, real interest rates fell an average of 1.5 percentage points lower in the following two decades than they would have otherwise. And yet, even before COVID-19, structural forces, such as rising debt, were causing interest rates to fall.

The above Markets in a Minute chart from New York Life Investments shows interest rates by country in 2021.

How Have Interest Rates Changed?

Broadly speaking, the majority of countries’ short-term interest rates have declined since COVID-19 began. Using data from CEIC as of April 2021, short-term interest rates are measured by three-month money market rates where available.

Interest rate change Apr 2020 – Mar 2021

  • Interest rates fell: 69 countries
  • Interest rates increased: 10 countries
  • Interest rates stayed the same: 3 countries

Across nearly every continent, interest rates have decreased as central banks enacted measures to combat the economic fallout of COVID-19.

Country/ RegionShort-Term Interest Rate Mar 2021 (%)*Short-Term Interest Rate Apr 2020 (%)**Interest Rate Change 2020-2021 (%)
Argentina3112.418.6
Australia0.00.1-0.1
Austria-0.5-0.3-0.2
Bangladesh0.77.1-6.4
Belarus13.910.63.3
Belgium-0.5-0.3-0.2
Bolivia11.58.62.9
Botswana3.54.4-0.9
Cambodia1.81.60.2
Canada0.10.3-0.2
China2.61.41.2
Colombia1.84.6-2.8
Costa Rica3.64.1-0.5
Cyprus-0.5-0.3-0.2
Czech Republic0.40.9-0.5
Denmark-0.2-0.40.2
Ecuador1.01.3-0.3
Egypt9.99.60.3
Estonia-0.5-0.3-0.2
Finland-0.5-0.3-0.2
France-0.5-0.3-0.2
Georgia8.09.0-1.0
Germany-0.5-0.3-0.2
Greece-0.5-0.3-0.2
Hong Kong0.21.7-1.5
Hungary0.81.1-0.3
Iceland1.42.4-1.0
India3.75.3-1.6
Indonesia3.84.9-1.1
Ireland-0.5-0.3-0.2
Israel-0.10.1-0.2
Italy-0.5-0.3-0.2
Japan-0.10.1-0.2
Jordan4.64.7-0.1
Kenya6.97.2-0.3
Kosovo-0.5-0.3-0.2
Kuwait1.51.8-0.3
Latvia-0.5-0.3-0.2
Lithuania-0.5-0.3-0.2
Luxembourg-0.5-0.3-0.2
Macau SAR0.31.7-1.4
Malaysia1.92.8-0.9
Malta-0.5-0.3-0.2
Mauritius0.11.2-1.1
Mexico4.26.2-2.0
Moldova7.08.0-1.0
Montenegro-0.5-0.3-0.2
Morocco1.52.0-0.5
Mozambique13.310.03.3
Nepal1.12.1-1.0
Netherlands-0.5-0.3-0.2
New Zealand0.30.30.0
Nigeria6.910.1-3.2
Norway0.41.4-1.0
Pakistan7.68.2-0.6
Panama0.20.7-0.5
Philippines1.23.2-2.0
Poland0.20.7-0.5
Portugal-0.5-0.3-0.2
Qatar1.11.10.0
Romania1.72.5-0.8
Russia4.76.7-2.0
Saudi Arabia0.81.2-0.4
Serbia0.91.2-0.3
Singapore0.40.9-0.5
Slovakia-0.5-0.3-0.2
Slovenia-0.5-0.3-0.2
South Africa3.84.2-0.4
South Korea0.81.0-0.2
Spain-0.5-0.3-0.2
Sweden-0.20.3-0.5
Switzerland-0.8-0.7-0.1
Taiwan0.50.50.0
Thailand0.60.9-0.3
Turkey208.411.6
UAE0.31.9-1.6
United Kingdom0.10.6-0.5
United States0.00.1-0.1
Uruguay5.010.1-5.1
Venezuela73.823.550.3
Vietnam1.74.2-2.5
Zambia14.016.5-2.5

Source: CEIC (Apr, 2021)
*Bolivia, Botswana, Costa Rica, Japan, Mauritius, Nepal, Qatar, Russia, Slovakia, Zambia have most recent data as of Feb ’21
**Costa Rica, Denmark, Mauritius, Norway & Russia have 2020 data as of Mar 2020

In the U.S., interest rates fell to record lows, dropping by 0.1 percentage points between April 2020 and March 2021. As vaccine rollouts accelerated in 2021, real GDP grew by an annual rate of 6.4% in the first quarter. Unemployment slightly improved to 6.1%, but still remains well above pre-pandemic levels of 3.5%.

Given these variables, the question of whether interest rates will rise is an open one.

Like the U.S., interest rates in the European Union declined, although at a greater rate—from -0.3% to -0.5%. To help improve economic conditions, the European Central Bank promises to purchase $2.2 trillion in government bonds until March 2022.

Together, the euro area, the U.S., Japan, and Britain have produced at least $3.8 trillion in new money supply since early 2020.

Interest Rates: The Steepest Gains and Declines

As money creation and low interest rates have become increasingly common phenomena, the focus has shifted to inflation.

With interest rates reaching 343% in 2020, Venezuela has been a poster child for hyperinflationary forces. Energy shortages only compounded the effect which was well underway before the pandemic. Between April 2020 and March 2021, interest rates jumped over 50 percentage points.

In addition, Turkey and Brazil raised interest rates in March 2021 to dampen inflation. Interest rates in Turkey have increased 11.6 percentage points over the time frame, one of the highest absolute changes globally.

In 2020, the lira faced historic declines, causing the price of imports to climb significantly.

Interest Rates by Country

On the other hand, Bangladesh has seen its interest rates decline 6.4 percentage points, the steepest drop across the dataset. To help offset the effects of COVID-19, the Bangladesh Bank lowered interest rates from 7.1% to 0.7%.

With rates falling 3.2 percentage points, Nigeria has also seen one of the greatest interest rate drops. In March, Fitch Ratings gave the country a B rating with a stable outlook, supported by its low government debt-to-GDP ratio and large economy.

Research has found that countries with better credit ratings and transparent fiscal infrastructure had greater ability for central banks to lower interest rates in response to the crisis.

Sign of the Times

Policy rate changes, a key central bank maneuver, have been an important tool in response to COVID-19.

As economic activity in some countries picks up, interest rates could rise. However, progress in vaccination distribution remains uncertain, especially in emerging markets.

In tandem with this, global central banks are applying unproven monetary policy frameworks, including money creation and large-scale bond purchases. While studies show that interest rates have been falling over the past several centuries, the confluence of these factors will be revealing in the years that follow.

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Markets in a Minute

Mapped: Global GDP Forecasts for 2021 and Beyond

The International Monetary Fund (IMF) revised its global GDP forecasts and anticipates a strong economic recovery from COVID-19 in 2021 and beyond.

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Mapped: Global GDP Forecasts for 2021 and Beyond

In the April 2021 version of its Global Economic Outlook, the International Monetary Fund (IMF) reiterated its expectations of a strong economic recovery over the next few years.

Economists acknowledged that, while the path of the pandemic remains uncertain, global vaccine rollouts represent the light at the end of the tunnel. As a result, global GDP growth forecasts for 2021 and 2022 sit at +6.0% and +4.4% respectively.

In this Markets in a Minute chart from New York Life Investments, we’ve mapped the IMF’s country-level GDP forecasts to see which areas are expected to have the greatest rebounds.

Country-level Data

The following table lists each country’s percentage GDP change for 2020, as well as forecasts for 2021 and 2022.

Jurisdiction2020 GDP Growth (%)2021 GDP Growth Forecasts (%)2022 GDP Growth Forecasts (%)
Afghanistan-5.04.04.5
Albania-3.55.04.0
Algeria-6.02.92.8
Angola-4.00.42.4
Antigua and Barbuda-17.3-3.011.9
Argentina-10.05.82.5
Armenia-7.61.03.5
Aruba-25.55.012.0
Australia-2.44.52.8
Austria-6.63.54.0
Azerbaijan-4.32.31.7
Bahrain-5.43.33.1
Bangladesh3.85.07.5
Barbados-17.64.17.7
Belarus-0.9-0.40.8
Belgium-6.44.03.1
Belize-14.11.96.4
Benin2.05.06.0
Bhutan-0.8-1.95.7
Bolivia-7.75.54.2
Bosnia and Herzegovina-5.53.53.3
Botswana-8.37.55.4
Brazil-4.13.72.6
Brunei Darussalam1.21.62.5
Bulgaria-3.84.44.4
Burkina Faso0.84.35.2
Burundi-1.32.83.7
Cabo Verde-145.86.0
Cambodia-3.54.26.0
Cameroon-2.83.44.3
Canada-5.45.04.7
Central African Republic03.55.0
Chad-0.91.82.6
Chile-5.86.23.8
China2.38.45.6
Colombia-6.85.23.6
Comoros-0.503.6
Costa Rica-4.82.63.3
Côte d'Ivoire2.36.06.5
Croatia-9.04.75.0
Cyprus-5.13.03.9
Czech Republic-5.64.24.3
Democratic Republic of the Congo-0.13.84.9
Denmark-3.32.82.9
Djibouti-1.05.05.5
Dominica-10.4-0.45.8
Dominican Republic-6.75.55.0
Ecuador-7.52.51.3
Egypt3.62.55.7
El Salvador-8.64.22.8
Equatorial Guinea-5.84.0-5.9
Eritrea-0.62.04.9
Estonia-2.93.44.2
Eswatini-3.31.40.9
Ethiopia6.12.08.7
Fiji-19.05.09.0
Finland-2.92.32.5
France-8.25.84.2
Gabon-1.81.22.7
Georgia-6.13.55.8
Germany-4.93.63.4
Ghana0.94.66.1
Greece-8.23.85.0
Grenada-13.5-1.55.2
Guatemala-1.54.54.0
Guinea5.25.65.2
Guinea-Bissau-2.43.04.0
Guyana43.416.446.5
Haiti-3.71.01.0
Honduras-8.04.53.3
Hong Kong SAR-6.14.33.8
Hungary-5.04.35.9
Iceland-6.63.73.6
India-8.012.56.9
Indonesia-2.14.35.8
Iraq-10.91.14.4
Ireland2.54.24.8
Islamic Republic of Iran1.52.52.1
Israel-2.45.04.3
Italy-8.94.23.6
Jamaica-10.21.55.7
Japan-4.83.32.5
Jordan-2.02.02.7
Kazakhstan-2.63.24.0
Kenya-0.17.65.7
Kiribati-0.51.82.5
Korea-1.03.62.8
Kosovo-6.04.55.5
Kuwait-8.10.73.2
Kyrgyz Republic-8.06.04.6
Lao P.D.R.-0.44.65.6
Latvia-3.63.95.2
Lebanon-25n/an/a
Lesotho-4.53.54.3
Liberia-3.03.64.7
Libya-59.71315.4
Lithuania-0.83.23.2
Luxembourg-1.34.13.6
Macao SAR-56.361.243.0
Madagascar-4.23.25.0
Malawi0.62.26.5
Malaysia-5.66.56.0
Maldives-32.218.913.4
Mali-2.04.06.0
Malta-7.04.75.6
Marshall Islands-3.3-1.53.5
Mauritania-2.23.15.6
Mauritius-15.86.65.2
Mexico-8.25.03.0
Micronesia-1.6-3.72.8
Moldova-7.54.54.0
Mongolia-5.35.07.5
Montenegro-15.29.05.5
Morocco-7.04.53.9
Mozambique-0.52.14.7
Myanmar3.2-8.91.4
Namibia-7.22.63.3
Nauru0.71.60.9
Nepal-1.92.94.2
Netherlands-3.83.53.0
New Zealand-3.04.03.2
Nicaragua-3.00.22.7
Niger1.26.912.8
Nigeria-1.82.52.3
North Macedonia-4.53.84.0
Norway-0.83.94.0
Oman-6.41.87.4
Pakistan-0.41.54.0
Palau-10.3-10.810.4
Panama-17.912.05.0
Papua New Guinea-3.93.54.2
Paraguay-0.94.04.0
Peru-11.18.55.2
Philippines-9.56.96.5
Poland-2.73.54.5
Portugal-7.63.94.8
Puerto Rico-7.52.50.7
Qatar-2.62.43.6
Republic of Congo-7.80.21.0
Romania-3.96.04.8
Russia-3.13.83.8
Rwanda-0.25.76.8
Samoa-3.2-7.81.7
San Marino-9.74.53.4
São Tomé and Príncipe-6.53.05.0
Saudi Arabia-4.12.94.0
Senegal0.85.26.0
Serbia-1.05.04.5
Seychelles-13.41.84.3
Sierra Leone-2.23.03.6
Singapore-5.45.23.2
Slovak Republic-5.24.74.5
Slovenia-5.53.74.5
Solomon Islands-4.31.54.5
Somalia-1.52.93.2
South Africa-73.12.0
South Sudan-6.65.36.5
Spain-11.06.44.7
Sri Lanka-3.64.04.1
St. Kitts and Nevis-18.7-2.010.0
St. Lucia-18.93.110.7
St. Vincent and the Grenadines-4.2-0.14.9
Sudan-3.60.41.1
Suriname-13.50.71.5
Sweden-2.83.13.0
Switzerland-3.03.52.8
Syrian/an/an/a
Taiwan Province of China3.14.73.0
Tajikistan4.55.04.5
Tanzania1.02.74.6
Thailand-6.12.65.6
The Bahamas-16.32.08.5
The Gambia06.06.5
Timor-Leste-6.82.84.9
Togo0.73.54.5
Tonga-0.5-2.52.5
Trinidad and Tobago-7.82.14.1
Tunisia-8.83.82.4
Turkey1.86.03.5
Turkmenistan0.84.63.9
Tuvalu0.52.53.5
Uganda-2.16.35.0
Ukraine-4.24.03.4
United Arab Emirates-5.93.12.6
United Kingdom-9.95.35.1
United States-3.56.43.5
Uruguay-5.73.03.1
Uzbekistan1.65.05.3
Vanuatu-9.23.24.6
Venezuela-30.0-10.0-5.0
Vietnam2.96.57.2
West Bank and Gaza-11.05.77.0
Yemen-5.00.52.5
Zambia-3.50.61.1
Zimbabwe-8.03.14.0

Just 27 countries saw positive GDP growth in 2020, including a cluster of Asian economies that includes China, Taiwan, and Vietnam. Although the virus originated in China, the country’s strict lockdowns enabled it to flatten the infection curve relatively quick. As a result, Asia’s biggest economy returned to pre-COVID GDP levels in 2020—something most others aren’t expected to do until 2023.

Forecasts for 2021 are very positive, with the vast majority of countries expected to bounce back economically. Within advanced economies, the U.S. is expected to be a strong performer. The IMF believes that the Biden administration’s new fiscal package, valued at $1.9 trillion, will provide a strong boost to growth.

Looking further to 2022, the IMF expects GDP growth to remain positive around the world. Many European economies will experience positive GDP growth above 3%, including France (+4.2%), Germany (+3.4%), and Spain (+4.7%). The European Central Bank (ECB) has relied on expansionary monetary policy to stimulate its economy during the pandemic, growing its balance sheet by over $2 trillion since February 2020.

Uncertainty Remains, Despite Vaccine Rollouts

Given the unpredictable nature of COVID-19 and its many variants, the GDP forecasts visualized in the above maps should not be interpreted as concrete figures.

India, which was forecasted to grow its GDP by 12.5% in 2021, is now facing the world’s worst surge of COVID-19, fueled in part by the emerging B1617 variant that many are dubbing a “double mutation”.

“We completely let down our guard and assumed in January that the pandemic was over.”
– K. Srinath Reddy, President, Public Health Foundation of India

It remains to be seen if India’s second outbreak will significantly impact its economy, or even the economies of other countries. This situation does, however, serve as a reminder that the virus can still surprise us.

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