Presidential Elections & the Stock Market
Whaddya know…Trump assumed office and calamity has not befallen us. So let’s regroup on some historical facts with regard to markets and elections. There is always a steady stream of opinions from pundits and prognosticators about how the election will impact the stock market. I remain the clanging gong to remind you (and everyone else) that you would be well-served to avoid the temptation to make any changes to a long-term investment plan based on these predictions. Let’s look at why that’s true:
SHORT-TERM TRADING AND PRESIDENTIAL ELECTION RESULTS
Trying to outguess the market is often a losing game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants. This includes expectations about the outcome and impact of elections. While unanticipated future events—surprises relative to those expectations—may trigger price changes in the future, the nature of these surprises cannot be known by investors today. As a result, it is difficult, if not impossible, to systematically benefit from trying to identify mispriced securities. This suggests it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after a presidential election.
Exhibit 1 shows the frequency of monthly returns (expressed in 1% increments) for the S&P 500 Index from January 1926 to June 2016. Each horizontal dash represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months where returns were between 1% and 2%). The blue and red horizontal lines represent months during which a presidential election was held. Red corresponds with a resulting win for the Republican Party and blue with a win for the Democratic Party. This graphic illustrates that election month returns were well within the typical range of returns, regardless of which party won the election.
LONG-TERM INVESTING: BULLS & BEARS ≠ DONKEYS & ELEPHANTS
Predictions about presidential elections and the stock market often focus on which party or candidate will be “better for the market” over the long run. Exhibit 2 shows the growth of one dollar invested in the S&P 500 Index over nine decades and 15 presidencies (from Coolidge to Obama). This data does not suggest an obvious pattern of long-term stock market performance based upon which party holds the Oval Office. The key takeaway here is that over the long run, the market has provided substantial returns regardless of who controlled the executive branch.
Equity markets can help investors grow their assets, but investing is a long-term endeavor. Trying to make investment decisions based upon the outcome of presidential elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in order to pursue investment returns.The research done by Brinson, Beebower and Singer in 1992 still proves true: 91.5% of a portfolio’s performance will be due to it’s allocation. Market timing, stock selection and other factors (news) are in the noise and usually have a negative influence.
Food for thought: since President Trump was elected, the stock market has gained $2 trillion in wealth. Steven Moore, economist and founder of Club for Growth, opined on Risk and Reward about the DOW crossing 20,000: ‘This could be the start of a big bull market rally.” While we’d all love that, we’ll just have to stay tuned and see what happens….and remain disciplined in our long-term strategies.