Election results won't sway the market

Beginning in late summer of every election year, the media begins to cover how the markets behave for the two major political parties. This often leads to questions from investors on how to position one’s portfolio if either candidate is elected. There is usually no shortage of advice from experts and pundits.

Historical data is often used to imply that one party is “better” for the markets. All candidates want you to believe that their election will ensure your prosperity. What does the data show? Not much. If you see a headline or story that purports that market history implies a specific election outcome will result in a specific market outcome, ignore the article. The data and common sense do not support the article’s suggestion. There is simply no statistically significant difference between the various combinations of presidential and congressional parties.

If during the 2004 campaign you looked back at market history, you’d see that the S&P 500 index of stocks returned an average of 12.9 percent in the year after the party that occupies the White House stayed in the White House. However, when a party change occurred, the average was a loss of 3.2 percent. That’s a big enough gap that many would think is compelling. It isn’t. Those averages come from only 12 data points and the variance is large.

If you acted on this information by buying stocks when President George Bush was reelected, you would have earned just 4.9 percent in 2005. That’s OK, but well below average and probably disappointing. If you continued to believe the cause and effect implication of the statistic and sold when the Democrats took over expecting a loss, you would have missed 2009’s 26.46 percent gain.

Mark Twain once said about averages: “A man with one foot in hot coals and the other in a bucket of ice is quite comfortable, on average.”

Markets have done well for both Democratic and Republican presidents, on average. The average result is higher for Democratic presidents. However, the data also shows that whenever the Republicans control the House, the Senate, or both, the average result is better than when Democrats control both chambers.

That is the data. On the common sense front, consider the following:

• There are many congressional seats up for grabs every two years. Politicians seek to take credit for anything you like and place blame on anything you don’t. We don’t know who will win the election or how the markets will react.

• We have survived, even thrived, despite some pretty bad presidents and ineffective Congresses.

• The market is far more complicated than these simplistic views imply. While there is no doubt the president is highly influential, he alone does not control economic policy and can’t pass laws without Congress.

• The market always creates both winners and losers. The policies of some politicians will inevitably benefit some businesses and hurt others. The market will rise and fall in anticipation of those policies. By the time the fate of these policies is clear, the market will look beyond these policies to other factors that may affect a company’s future and adjust prices accordingly.

From an investment perspective, we caution about making big moves in anticipation of market reactions. A well-structured portfolio is one that is not dependent upon an accurate electoral prediction. A good portfolio doesn’t take more risk than is necessary to reach your goals. It is broadly diversified enough that big bets are avoided and any tactical changes are done in the context of your family’s best interests.

You may have felt a similar anxiety in past elections. Go ahead and formulate your opinions of the candidates and argue on their behalf with all the passion you wish to display, but be careful not to go too far. Heightened emotions are not conducive to sound decision-making.

This is not to imply that who wins doesn’t matter. Without a doubt, the next president will have an effect on the markets, but speculating on that effect is not a sound strategy for investors. Mark your calendar – Election Day is Tuesday, Nov. 6. Please vote, but don’t let the hysteria of the race distract you from your family’s goals.

Ron Tamayo, CFP, is a founder and partner with Moisand Fitzgerald Tamayo, LLC, a wealth management firm based in Maitland. He has been a financial planning practitioner for 25 years and currently serves on the Editorial Review Board of the Journal of Financial Planning. He can be reached at [email protected]