How to pick election-proof stocks

Hey folks, it's Hoda, Stock Card's CEO. The presidential election period tends to be a difficult time for investors. The news cycle gets faster, and there is a lot more attention to the state of the economy and the stock market. That leads to more speculations, regular changes in investor sentiments, and more rapid transitions between fear and hope cycles. Being jittery and worried about what to invest in and what to do about your portfolio is very normal and common and we all experience those ups and downs in emotions. In this post, I dig deep into whether everyone's worries about the impact of the election on the stock market are justified and how to pick stocks despite the election jitters. I'd also share a list of stocks that can help you election-proof your portfolio. ​

Are the jitters real?

If you look at the market volatility index (VIX) in the days leading up to the election in the last eight elections (since 1988), the implied volatility in the market peaks running up to the actual day. Wells Fargo Investment Research Institute had a chart that visualized such implied volatility:

Source: https://www.marketwatch.com

Considering such a volatility level, investors have two choices:

1. Let their emotions get distracted by the news cycles and market jitters, or
   
2. Look at the data and make informed decisions accordingly. ​

At Stock Card, we tend to camp in the second category. It's essential to calm your emotions with the power of data and information. Let's look at whether being worried about the election result and its impact on the stock market is grounded on reality. When you look at the S&P 500 return in election years since 1928, there are only four instances when the market ended the year in negative. Let me say that again, in 23 election years, there were only four years that the return has been negative. Does that mean this year is going to be the same? No! But, as a rule of thumb, the stock market's odds of success are in favor of investors, election year or not.

Chart by Stock Card, Source https://www.thebalance.com

The disconnect

Comparing the heightened implied volatility and the actual historical return of the market, it seems that there is a true disconnect between market jitters, perception, and reality. If someone is day trading, perhaps there is an opportunity to play with the market's jitters. For example, there is a theory called Presidential Election Cycle Theory that says the market typically hits its best return on the 3rd year of any president's term, all the way to the December of the election year. And, if you look at the history of the market in the last 50 years, there is actually enough evidence to support that. However, statistically, the theory is not proven. Fifty years of history only gives us 12 election cycles. Without getting to the science of calculating statistical significance, that's just not enough data to prove the presidential election theory. And, by the same notion, whatever historical analysis you'd want to do in order to play market jitters is not going to be scientifically proven. Media shares data that are correct, but they can't be used as a single source of truth due to the lack of statistically proven investment theories during the election years. You would need hundreds if not thousands of election cycles to come up with a scientifically proven election-based strategy, and there are simply not enough election cycles in our history.

How to pick stocks despite the reality and sentiment disconnect

Okay, we said all that, and I hope you've found such information enlightening and could use it to tame your emotions. But, now what? What does it mean for those of us who would want to invest in the stock market now? The answer to that question is to look at the current environment and evaluate what strategy goes well with the current economic and market conditions:

1. We have the pandemic that is still going on, and depending on the vaccine progress, we may be in for an extended period of social and economic uncertainty.
2. After the initial dip, the market has now recovered to pre-pandemic levels. That means we are back to the 11-year bull market and the valuations in certain sectors are excessively stretched.

In summary, both the stock market and the economy are dealing with a heightened level of uncertainty. A prudent strategy could be to reduce uncertainty in your portfolio and pick stocks that do not come with inherent uncertainty.

What are some of the sources of uncertainty when it comes to individual companies:

1. Lack of public history (e.g., recent IPOs)
2. Small market capitalization - which means less stability
3. Being listed on OTC markets - which means less analysis and public market scrutiny
4. Having too much debt - which may threaten operational stability
5. Lacking track record of sales and return success 

​That's where Stock Card can help you. 

Use Stock Card to pick election-proof stocks

​On Stock Card's Discover page, you can find a "Filter" tab. This is one of the most powerful features of Stock Card. It enables you to screen stocks by themes that matter. For example, narrow the universe of publicly-traded stocks to those with no cash concerns and have a track record of sales and growth success. You don't need to figure out which financial metrics translate to those themes. You can simply choose the themes such as no cash concerns as filters and Stock Card does the rest for you. 

A list of election-proof stocks

As we discussed above, stocks with low inherent uncertainties can help you reduce overall uncertainty in your portfolio and reduce the impact of the so-called election jitters. I used market capitalization, stock exchange, growth potential, cash availability, and past performance to build a list of stocks that fit such a description. I also went ahead and saved the list as an "election-proof watchlist." You can easily access that watchlist by visiting Stock Card. Click on the link below and get the list. You can add them to your personal watchlist, add additional filters and save a new filter that better fits your criteria. Go ahead, try it now!

Access the list of election-proof stocks