With uncertainty about the election’s outcome running high, markets on Wednesday seemed to have rewarded on industries and stock – like the tech sector – that have witnessed enduring wins in recent months.
Scott Yonker, associate professor of finance at Cornell University’s SC Johnson College of Business, says that the trend shows investors’ animal-like instinct to stick with the likely winners in times of uncertainty.
“Humans are social animals and at times of great uncertainty animal instincts tend to override reason.
“Just like animals, investors herd in the face of danger or uncertainty by following the strongest in the pack. For investors this means pouring money into recent ‘winners,’ which academics call momentum trading. Over the course of the pandemic, the technology sector has been the big winner.
“Returns to the tech-heavy NASDAQ 100 have outpaced those of the Dow Jones Industrials by nearly 35% this year. Whether moving into tech the day after the presidential election is a good move will remain to be seen. Academics have shown that momentum trading is susceptible to crashes, but also that a strategy of buying recent winners outperforms the market in the long run.
“As election uncertainty subsides we should expect reason to again dominate investor decisions, choosing stocks based on the expected costs and benefits from policies of the chosen government.”