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U.S. Dollar Performance After U.S. Elections

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U.S. Dollar Performance After U.S. Elections

U.S. Dollar Performance After U.S. Elections

News outlets often draw correlations between U.S. elections and market performance. In turn, some investors opt for more conservative portfolios until the election uncertainty is overcome. But how much influence do elections really have?

In this Markets in a Minute from New York Life Investments, we show U.S. dollar performance after U.S. elections to illustrate that there is no clear trend between the two.

What is the U.S. Dollar Index?

To start, we used the U.S. Dollar Index to track performance, which measures the U.S. dollar relative to a basket of six currencies.

CurrencyWeight
Euro57.6%
Japanese Yen13.6%
British Pound11.9%
Canadian Dollar9.1%
Swedish Krina4.2%
Swiss Franc3.6%

Source: Intercontinental Exchange

Any changes in these respective currencies can affect the performance of the U.S. dollar.

Post-Election Performance

For each U.S. election from 1988 to 2016, we calculated the U.S. dollar index’s percentage change since election day. Changes were tracked over the course of a year, or 250 trading days.

There was no clear trend in U.S. dollar performance after U.S. elections. Here’s another look at the data, this time showing the range in changes over the year and percentage change at the end of the period.

U.S. Dollar Performance After U.S. Elections

The U.S. dollar finished up in four years, and down in the other four years. The years after the 1988, 1996, and 2008 elections saw the largest fluctuations in values.

In 1989, the U.S. dollar surged due to three factors:

  • High interest rates, which attracted foreign investment
  • Political instability in West Germany and Japan
  • Strength of American stock and bond markets

In the period after the 1996 election, the dollar climbed again. While foreign currencies collapsed amid the Asian financial crisis, the U.S. economy enjoyed rapid growth and was seen as a safe haven for investors.

On the flip side, the U.S. dollar saw significant declines in the year after the 2008 election. The European Central Bank lowered rates in response to the global financial crisis, raising confidence in the euro and causing the U.S. dollar to fall.

What Investors Can Focus On

In each case above, significant movements were caused by macroeconomic factors, rather than the outcome of the U.S. election.

Here are a few factors that can have a direct impact on market performance:

  1. Inflation decreases the value of a dollar over time. Investors should consider how prevailing interest rates compare to inflation, and look for assets that build wealth over time.
  2. Unemployment rates have widespread impact. When unemployment is high, economic output and consumer spending are reduced.
  3. Economic growth signals healthy demand, and may boost corporate profits and drive up asset prices.

While elections can cause investors to change their asset mix, it’s important for investors to focus on long-term, broader factors that directly influence the market.

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Markets in a Minute

Which ESG Risks Are Affecting Your Portfolio?

It’s important for investors to identify which sustainability issues they’re most exposed to. Find out more in this breakdown of ESG risk by industry.

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Visualizing ESG Risk by Industry

Aging populations, climate change, and data security are some of the world’s most pressing issues, but what theme do they all share? For investors, the answer is certain: sustainability.

Sustainability is a concept that’s quickly moved into the mainstream, and is best described as the consideration of environmental, social, and governance (ESG) factors when analyzing companies. Combining these non-financial metrics with traditional analysis has been proven to have a positive influence on long-term returns.

In this Markets in a Minute chart from New York Life Investments, we’ve mapped the ESG risk profiles of four prominent industries to gain a better understanding of the sustainability issues they’re likely facing.

Fossil Fuels

Investors in this sector have substantial exposure to all three ESG risks, with environmental issues being the most significant.

RiskImportanceIssues to Consider

Environmental

High
  • The global transition to green energy
  • Stricter environmental regulations
  • Harm from spills and other accidents

Social

Medium
  • Strained community relations
  • Shifting consumer attitudes

Governance

Medium
  • Shareholder transparency
  • Risk management structure

The global transition to renewable energy paints a complex future for the sector, though it’s uncertain when oil demand will peak—predictions range from 2025 all the way to 2040. Nevertheless, market participants are taking action. To date, over 1,200 institutional investors representing $14 trillion in assets have made commitments to divest from fossil fuels.

Social risks are another source of uncertainty, especially as public awareness around climate change increases. A planned expansion of the Keystone Pipeline System, referred to as Keystone XL, has faced nearly a decade of public resistance and currently remains blocked by the U.S. Supreme Court.

Last but not least are governance risks. With many investors considering the switch to a fossil fuel-free portfolio, shareholder transparency will be of utmost importance. The onus will be on company management to demonstrate that they have a clear understanding of the risks and opportunities ahead. Royal Dutch Shell, the world’s fourth largest oil company, has made progress on this front by announcing its strategy for achieving net-zero emissions by 2050.

Financials

Social and governance risks are the top priorities for investors in the financial sector. Firms that finance the fossil fuel industry may have indirect exposure to environmental risks.

RiskImportanceIssues to Consider

Environmental

Low
  • Indirect exposure to the fossil fuel industry

Social

Medium
  • Aggressive or deceptive selling practices
  • Client relations


Governance

Medium
  • Corporate governance
  • Executive compensation

Underpinning the strength of the financial sector is consumer trust and client service. By using aggressive or deceptive selling practices, firms risk severe reputational damage and even financial penalties. Wells Fargo, America’s fourth largest bank, was recently fined $3 billion for its account fraud scandal that emerged in 2016.

These issues are closely related to governance risks, where weak internal structures can allow fraudulent activities like money laundering to take place. In fact, over a 15 month period ending in 2019, global banks were fined $10 billion for engaging in the activity. Experts believe that 60% of laundering fines resulted from criminals slipping past screening systems.

Healthcare

Social risks are the top concern for healthcare investors, given the sector’s important role in public health and well-being.

RiskImportanceIssues to Consider

Environmental

Low
  • Chemical activities

Social

Medium
  • Product safety and recalls
  • Inappropriate or misleading marketing

Governance

Low
  • Patient privacy

Unsafe products are one the most clear-cut issues because they directly harm society and shareholders. Johnson & Johnson, one of the world’s largest healthcare companies, has faced thousands of lawsuits for failing to warn consumers about asbestos in its baby powder products. The company was recently ordered to pay $2.1 billion in damages by a Missouri appeals court.

The use of inappropriate advertising is another issue that investors may want to watch out for. In 2019, Mundipharma was fined by the Australian government for making inaccurate statements in its marketing materials for opioids.

Software & IT Services

Companies in this sector are exposed to various social and governance risks, but are not known to be large polluters.

RiskImportanceIssues to Consider

Environmental

Low
  • Operation of data centers

Social

High
  • User privacy
  • Data security

Governance

Medium
  • Shareholder structure
  • Antitrust disputes

Many firms in this industry collect and monetize user data, exposing their shareholders to data privacy and security risks. Facebook has been at the center of numerous controversies in recent years, including the Cambridge Analytica scandal, which saw the unconsented collection of personal data from 87 million users. Polls found that 44% of Facebook users viewed the platform more negatively after the scandal.

These risks are likely to be amplified as governments take a firmer stance on data regulation. In 2018, the EU implemented its General Data Protection Regulation (GDPR), one of the world’s toughest privacy and security laws. In certain cases, noncompliance with the GDPR can result in fines equal to 4% of a company’s global revenues.

Navigating an Uncertain Future

Global sustainability issues are creating a more challenging environment for businesses in all types of industries. To hedge these risks, investors are turning to ESG in massive numbers—the value of sustainably managed assets now sits at $40.5 trillion, nearly double the amount from four years ago.

It’s important to remember, however, that businesses are unique. A social issue affecting one industry may not be as relevant for another. When armed with this knowledge, investors will be able to make more informed decisions that strengthen the long-term resiliency of their portfolios.

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Markets in a Minute

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

Election jitters prompt investors to put their money in low-risk assets. We analyze why this may not be the best idea for your portfolio’s asset mix.

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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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