Technical Talk: 2016 Election Offers Lessons for Equities in 2020 | Lord Abbett
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Equity Perspectives

Market action around the last U.S. presidential election shows that emotion-driven investment decisions can be detrimental to portfolio returns.

Read time: 3 minutes

With the 2020 U.S. presidential election just weeks away, the U.S. equity market appears to be heading into a period of uncertainty, one where a lot of biases and emotions may wind up informing investment decisions, especially as the news cycle intensifies. But as history has shown, letting emotion and sudden changes in sentiment drive investment decisions may be detrimental to equity returns.

We believe that technical investing can provide a useful counterweight to sentiment-driven portfolio moves, offering an unbiased, objective way to evaluate the market. As a reminder, Lord Abbett employs technical analysis as a component of its Innovation Growth portfolios. It’s a strategic overlay aimed at identifying which stocks selected by our investment team have upside potential based on technical signals, and which ones may have reached peak price momentum and appear poised to move to the downside.

Perhaps this concept of how emotion- and sentiment-based investment decisions can go wrong is best illustrated by examining the market action in the run-up to, and the aftermath of, the 2016 U.S. Presidential election. A lot of people thought they knew who would win, with Hillary Clinton being the clear favorite based on a variety of well-regarded polls and other indicators. That, of course, proved to be a mistake. Also, once Donald Trump emerged as the winner, certain sectors (financials, for example) were favored for a short period of time but failed to sustain those gains as the market’s attention shifted elsewhere, and the policy priorities of the Trump administration became clearer.

The sudden shifts in sentiment are perhaps best illustrated by the behavior of three sector-linked ETFs, as shown in Figure 1.

 

Figure 1. Election 2016: A Tale of Three Sectors

Relative strength of sector-linked ETFs versus S&P 500 Index, January 1, 2016­–December 31, 2017

 

 

Source: FactSet. Data as of September 28, 2020. Sectors represented by the following exchange-traded funds: Industrial Select Sector SPDR Fund (XLI); Financial Select Sector SPDR Fund (XLF); Technology Select Sector SPDR Fund (XLK). Relative strength is a measure of the price trend of a stock or other financial instrument compared to another stock, instrument or industry. It is calculated by taking the price of one asset and dividing it by another. In technical analysis, relative strength is often used as an indicator of equity price momentum.
The information shown is for illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.

 

Financials popped going into the 2016 election, but then underperformed afterward, even as it became clear that Trump, a proponent of less regulation, had won. Industrials, which many observers believed would benefit under a manufacturing-friendly Trump administration, sold off in the immediate aftermath of the Trump victory. Technology shares ran up into the election and then sold off right after when financials and industrials were going higher. Then the sector started a steady climb higher as the industrials and financials started to sell off.

Here’s another caveat: Factors outside the electoral/governmental realm could overwhelm the perceived benefits for sectors from the election. Examples from 2016:

  • As noted earlier, financials were seen as being potential beneficiaries of deregulation. Although some deregulation did happen, its influence on sector profits was overwhelmed by the effects of low U.S. interest rates.
  • Energy was also seen as being a possible beneficiary of deregulation but was overwhelmed by a decline in global oil prices.

The Technical Investing Perspective

We believe technical analysis prompts questions that might arise when a stock, sector, industry, or asset class is not behaving as expected. Think of it as a way to check one’s confirmation, or anchoring bias. While corporate earnings reports and related fundamental data provide a quarterly update on the winners and losers, technical indicators show you in real time, on every trading day, what the market likes within key indexes and sectors. We think this can offer a useful intermediate-term perspective for investors, one removed from the welter of news headlines and expert, stock market pronouncements on any given day.

We’ll finish with three observations going into the 2020 vote:

  1.  We don’t think it’s a wise idea for investors to play the election purely on a prospective result because even the so-called “smart money” can’t always predict the result with accuracy. Even if you get the result right, you won’t know for certain how the market will react.
  2. Companies with strong secular tailwinds likely will continue to display strength regardless of who is the president, or which party is in charge. This emphasis on shaping “megatrends” is a key facet of our Innovation Growth approach.
  3. Finally, we think a focus on the price momentum of a company’s stock, along with the firm’s operating momentum (i.e., trends in revenue and profit growth), remains an effective, emotion-free input into investment decisions.

Over the coming weeks and months, we will be providing updates as we observe where the momentum develops. Stay tuned.

We believe combining fundamental and technical analysis is central to our efforts to generate returns—and manage risk—in select equity portfolios. We will continue to provide updates to help equity investors make sense of current technical trends, and the opportunities they may present.

 

A Note about Risk:  The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. All investments involve risks, including the loss of principal invested.

Glossary of Terms

Exchange Traded Fund (ETF) is a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.

Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume.

The S&P 500® Index is widely regarded as the standard for measuring large cap, U.S. stock market performance and includes a representative sample of leading companies in leading industries.

Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

This commentary may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education.  No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein.   If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in this commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

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