3rd Qtr 2016: Presidential Elections and Market ReturnsSubmitted by Legacy Financial Group on October 28th, 2016
Despite all the negative news constantly streaming on our TV screens, the equity and fixed income markets continue to perform very well thus far in 2016. In fact, this year we have seen many equity asset classes bounce back from a lackluster 2015. US value stocks, US small stocks, emerging markets and the energy sector are handily outperforming the S&P 500 in 2016. Yet another lesson in why investing requires discipline and a long term, evidence based strategy and not predictions or forecasts involving short term market movements.
Now that we are only a month away from the elections, many people are wondering how this event might affect their investments. Investors often get caught thinking that if their candidate wins the market will do much better and if the other candidate wins the market will immediately fall sharply. The problem is that both sides of the political isle think the same thing!
So who is right? Maybe surprising to some, the answer is neither. While the US Presidential election is certainly a major world event, it is but one of thousands of variables that can affect the stock market. The chart below shows the average annual returns for every president since 1929.
Presidents vs. Markets and Inflation
It is clear there is no discernible pattern across president tenure. In fact, the average of Republicans vs. Democrats is almost a wash with Democrats having a slight edge in stock market performance. The data strongly suggests that using the presidential election as a barometer for stock market performance is not a sound investment strategy. Any predictions or prognostications on who will win and what that might imply for the economy should have no bearing in how you invest your long term assets. As always, we stay focused on building portfolios based on empirical data and research that has a strong correlation with increased long term expected return and reduced risk.
It is very normal to worry about the election; however, fear of an inevitable market crash due to the win or loss of a certain candidate not supported by past evidence. Instead, evidence suggests we should build investment portfolios around your life goals and what we do know about expected return and risk. That is the only way to create and sustain a successful investment experience.