Despite all of the attention on the presidential election these days, there's one major aspect of it that we can put to bed before we go much further [for those of us with globally diversified, evidence-based investment portfolios]. A lot of people I encounter ask what this all means for investing. Do we sell our stocks if a certain candidate wins? And should we do it before or after the election? How bad are the markets likely to get?
Well, let's look at the data around past presidential elections to see what we can learn. Would you be surprised if I told you that the idea of a presidential election impacting stock returns isn't new? So, first, a reminder that I'm not inclined to make any decisions akin to timing markets—trying to place sales before things get bad or trying to time buys right before markets take off. There's just no evidence supporting the ability to do so in a repeatable, profitable fashion.
S&P 500 Index | Growth of $1 over 9 decades and 15 Presidents
When put in this perspective, the S&P 500 index seems to grow regardless of which party has control of the white house. It also seems fair to point out that the index has grown after the respective reign of almost every president shown during this time period.
S&P 500 Index | Histogram of Monthly Returns
January 1926–June 2016
Another perspective is monthly returns. Each horizontal bar in the image above represents one month's return, and the red & blue colors highlight the months in which a presidential election was held. You can see how the election-month returns fit into the normal distribution of all other months' returns in a random fashion. Again, nothing especially alarming here either.
Of course, attention to and awareness of short-term happenings in the markets are educational and important. The real takeaway, though, is that long-term investment planning often works out better when the short-term stuff is completely ignored.
Past performance is not a guarantee of future results.
Indices are not available for direct investment;
therefore, their performance does not reflect the expenses associated
with the management of an actual portfolio.
The S&P data is provided by Standard & Poor’s Index Services Group.