Sharemarkets shook off election uncertainty, here’s why

On election night the world was left with total uncertainty around who had the more likely path to victory. Despite this, share markets rose.

john HeadshotsTRY sq John Berry 3 minute read

OPINION: Before the US election it was widely believed that only a clear win by President Trump or Joe Biden would give certainty and be positive for markets. No clear winner or a marginal win with legal challenges was expected to send markets lower.

On election night the world was left with total uncertainty around who had the more likely path to victory. Despite this, share markets rose.

US tech stocks were up almost 7 per cent over the following two days. Broader US shares were up over 5 per cent. This was a global reaction, with share markets in China, UK, Germany, Japan and both sides of the Tasman up over the two days despite uncertainty. So how did markets switch to thinking a close election was positive?

Looking back, a close election win for Biden, even with court challenges, can be explained as a good thing. Republicans would hold the Senate and Democrats the House of Representatives, meaning gridlock (or a need to compromise).

Tax concessions under Trump’s administration will not be wound back. The healthcare industry won’t face seismic change and large tech stocks, at risk of being broken up by Democrats, are now safer. Also, the risk that legal challenges will succeed is assessed as low.

How markets react to an event can be very different to what was expected, but with hindsight can be easily explained. Back in March share markets were in freefall and your KiwiSaver balance was likely heading south.

Countries were closing borders and many companies were staring at a bleak future. Economists were saying our housing market would sell off 10% to 15%.

It never happened, in fact, the reverse is true, the housing market has been a frenzy. It can be explained looking back because the Reserve Bank took quick action to drive down interest rates and ease lending rules. But the point is that this outcome wasn’t expected.

This is not a one-off or unique reaction by markets. It is not uncommon for shares to respond in a way that may in advance seem counterintuitive. For example, last month Google was hit with the biggest anti-competition case in our generation. The US Department of Justice alleges that Google is using its power as an online monopoly search engine to freeze out competitors. This impacts the way Google does business and makes money. Yet Google’s share price immediately went up 1.4 per cent, not down.

The explanation is that the lawsuit was not unexpected, so possibly already recognised in the share price. And it could have been worse as the court action is not asking for Google to be broken up as a company.

As investors, what is the message here from an uncertain election result that drives share prices up, an uncertain economy that drives housing prices up and an uncertain future for Google that drives its share price up?

Each of these was a known possible outcome that you would expect to drive prices down not up. But markets are sophisticated and can already price in these outcomes, or other events can happen that were unexpected but counterbalance the bad news (such as an immediate and substantial lowering of interest rates).

As an investor, for example in KiwiSaver, don’t make rash decisions to switch risk profiles from a growth fund to a conservative fund. Picking the top, the bottom or the turning point of a market or share price is really hard. If you are in for the long term, then stay in there for the long term.

John Berry is chief executive at Pathfinder Asset Management, and KiwiSaver provider CareSaver. His views in this article are general only and are not recommendations for any particular person in relation to any share or financial product.

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