If the stock market is up in the three months leading up to the election, put your money on the incumbent party. Losses over those three months tend to usher in a new party
This year when election soothsayers and fortune tellers made totally erroneous predictions, there was a Wall Street statistic that called the results – markets were down leading up to the elections, essentially predicting a Republican upset. This prognosticator has generally played out, other than one time when Eisenhower, the incumbent, won with a negative stock market in 1956.
While speculating on the outcome of elections can be a fun pastime, it is impossible to predict markets, or even the economy. There is a lot of anecdotal information suggesting that one political party or another is good for the markets, but by and large these are based upon very limited data.
It is crucial to have a well-defined, written portfolio investment strategy, to follow it rigorously, and to stay the course – especially in times of political or economic certainty
At Veda Financial, we find that a big component of managing portfolios for clients is clearly articulating the investment strategy and delineating the importance of executing to the plan with a long term horizon in mind.
Example: An investor who was very nervous leading up to the elections, wanted to liquidate his entire portfolio in November. We explained to him that is impossible to predict what the markets will do and that our advice was to stay with a long-term view and hold the current investments. We also discussed our exit plan in the face of any “black swan” volatility. As it turns out, volatility or any adverse effects in the markets have been a non-issue so far.
The biggest single risk to an investor’s portfolio is not staying consistently invested!
THE MARKETS UNDER US PRESIDENTS
Which political party is in power has less to do with the markets than it does with how we react to partisan changes. The field of behavioral finance has been used extensively to study the impact of psychology in investment decision making.
Tip: Over an election cycle, it is advisable to restrict trading to within a predetermined limit – say 5% of the overall portfolio, to avoid emotion driven investing
Some more facts about politics and markets:
1. The annualized return under Democratic Presidents has been 9.7% and under Republican presidents has averaged 6.7%
2. The best returns were achieved under a Republican controlled a White House, Senate and House of Representatives with a yearly return of 15.1%
3. When the Commander-in-Chief suffers a negative approval rating-from just 35% to 50%-the Dow Jones industrial average has returned four points more than when a majority of the electorate is satisfied
4. The best average market performance has been achieved when the Presidency and Congress control resides with opposing parties
But before we celebrate or lament the stock market prospects under the new administration, we need to realize that the statistics are based upon a highly-limited sample size. The last point almost suggests that Wall Street likes gridlock. Here the reasoning might be that the markets detest uncertainty and when there is opposition, less is accomplished – a situation that is preferable to the markets.
“Deep structural problems haven’t been solved, and it’s unclear how we will create jobs and get the economy growing again.” – that was Peter Thiel, the famed investor and libertarian in 2008. The markets rose 25% that year, starting a 7-year bull market along with falling unemployment (Peter Thiel’s own fund lost 26% that year).
Clearly, the best and the brightest cannot predict what the economy will do in the current presidential cycle. What we do know is how things are currently, and what are the likely macro factors that are important such as interest rates and monetary policy, and accordingly build a roadmap for a robust portfolio regardless of the political landscape.