Trying to plot your investment strategy based on foreign elections (or even local ones) can be a frustrating endeavour.
Trying to plot your investment strategy based on foreign elections (or even local ones) can be a frustrating endeavour.
Opinion by Nick Stewart
* Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke’s Bay-based financial planning and advisory firm.
OPINION
As we approach another US presidential election, many investors start to wonder how the results might impact their portfolios.
Willwe see higher market volatility in November? What if a particular candidate wins or loses? Is the stock market doomed if the Democrats take office, or is it doomed if the Republicans take office?
The quick answer: One cannot predict market performance based solely on who wins the White House.
History has shown us that no president (not Obama, not Trump, nor Biden) has single-handedly transformed the stock market or economy, despite the dire warnings from both sides of the political aisle.
Consider this: The US stock market is valued at $50 trillion. The economy generates $28 trillion in GDP annually. These are massive, complex systems that no single individual controls. It’s natural for investors to look for patterns between election outcomes and market trends. Yet it’s easy to see that over nearly a century, the stock market has trended upward regardless of who sits in the Oval Office.
The outcome of elections do not affect the upward trend of stocks over time, writes Nick Stewart.
Experienced investors place their bets on companies that focus on serving customers and growing their businesses, not on political figures.
While US presidents can influence market returns (as do many other factors - foreign policy decisions, interest rate changes, oil prices, and technological advancements to name a few), stocks have consistently rewarded disciplined investors regardless of whether red or blue banners are up.
We see similar discussions and predictions every four years as headlines bombard investors regarding the latest polls, potential policy changes, or promised tax reforms. While it’s only natural to wonder what the outcome of the election will mean for your investment portfolio, worrying about it (or trying to accurately predict what the market will do) is usually a waste of both your time and energy.
Why? Because tinkering with your portfolio based on hunches about election outcomes could lead to costly mistakes that you will later regret. Better to be a strategic investor and consider the following:
Markets are forward-looking
Forward predictions are harder than they seem. While it’s true that policy decisions and the regulatory environment can influence markets, they are just a fraction of the many factors at play. Furthermore, in today’s globalised economy, the actions of a single government – even the US government – are less influential than they once were.
For example, more than half of the S&P 500′s revenues are generated outside the US.
Market participants constantly assess these and other factors, adjusting their expectations and making decisions that shape market prices in real time. This collective action builds future expectations into current prices, making it challenging to predict market outcomes based on events like elections.
As the election draws closer and media coverage intensifies, it’s tempting to think you should adjust your portfolio to match the way the wind blows. But markets are quicker to act than people – and have likely already responded to the same information, discounting the expected outcomes.
Successful investing often requires looking beyond the obvious headlines to identify underlying trends and opportunities. Trying to outguess the market based on election results is a risky endeavour that often leads to disappointment.
Cause and effect aren’t neatly linked in financial markets
Promises made during election campaigns provide insight into a candidate’s intentions. The reality is shaped by bureaucracy, compromise, and political negotiation. Even when elected officials attempt to fulfil their promises, the outcomes can be far from what was initially envisioned.
Investors often seek simple explanations for market movements, drawing direct lines from cause to effect. But market movements, especially over short periods like a presidential term, can appear totally random.
While four or even eight years may seem significant for the political landscape, that would be considered short as an investment horizon. The randomness and complexity of market behaviour further complicate efforts to predict how election outcomes will impact stock returns – because truly, you cannot equate one to the other.
Market returns vary widely around elections
A study by US fund manager Avantis Investors analysed data from 23 presidential elections between 1928 and 2016, focusing on market returns in the three months leading up to the election month and the three and six months following it. The results reveal that while average returns were positive in all three periods, they varied widely. The average return for the six months following the election was about 7.5%, but the range extended from -14% to over +56%.
This wide variation indicates that there is no clear pattern or easy way to predict what a candidate’s victory will mean for the stock market, either before or after the election. Similar conclusions can be drawn when comparing average returns during and after election years.
Historically, politics have little long-term impact on the market
It’s natural for investors to let their political views influence their market predictions, but history suggests this is a mistake. The stock market has advanced regardless.
Shareholders invest in companies; and companies remain focused on growing their businesses, regardless of who is in office. As a result, there is no conclusive evidence to suggest that the president’s party has a statistically significant impact on US equity market returns.
In the long run, disciplined investors have been rewarded through Democratic, Republican, and mixed congressional control.
The key takeaway for investors is to stay invested in the market, despite the uncertainty that elections often bring.
The Bigger Picture: Stick to your long-term plan
Every four years, the uncertainty surrounding elections leads many investors to retreat to cash, hoping to wait out the volatility. But retreating whenever there’s a political dust-up on the horizon is a surefire way to lose money over time.
Times like this underscore the importance of having a long-term financial plan in place. A well-constructed plan accounts for uncertainties like elections and eliminates the need to react impulsively to the latest news.
Instead of worrying about the potential short-term effects of the election, focus on the bigger picture. By doing so, you’ll be better positioned to achieve your long-term financial goals, regardless of the political landscape.
Trying to plot your investment strategy based on foreign elections (or even local ones) can be a frustrating and fruitless endeavour. Sitting down with your local financial adviser for a face-to-face chat is a much better use of your time.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
