In less than two weeks, Americans will head to the polls to elect the next president of the United States. Between now and then, we will continue to receive an onslaught of words and images from both candidates. Our recommendation is this: avoid the temptation to make any changes based on polls or predictions.
Trying to outguess the market is a crapshoot. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of all market participants, including the outcome and subsequent impact of presidential elections. While unanticipated future events will cause prices to change, the nature of any future surprise cannot be known by investors today.
Exhibit 1 shows the frequency of monthly returns for the S&P 500 Index from January 1926 to June 2016. Each horizontal dash represents one month. Each vertical bar shows the cumulative months for which returns were within a given one percentage point. For example, the tallest bar represents all months when the S&P 500 return was greater than 1%, but less than or equal to 2%. The blue and red lines represent the months during which a presidential election was held. If the line is red, a Republican won. If the line is blue, a Democrat won.
Interpreting these results, it is evident that election month returns fell within the typical range of returns, regardless of which party won the election. Furthermore, there is no evidence that one particular party has been better for the economy than the other. (exhibit 2 shows the growth of a dollar invested in the S&P 500 Index over nine decades and 15 presidencies)
In conclusion, the stock market can help investors grow their wealth in order to achieve long-term goals (such as a comfortable and secure retirement), but along the way there will be bumps in the road. There will be challenges and temptations.
However, trying to make investment decisions based upon the outcome of a presidential election (or any other future event) is unlikely to result in consistent excess returns. At best, a positive outcome based on such a strategy will be the result of random luck. At worst, it will lead to a costly mistake. Discipline, patience, and an evidence-based investment strategy is the more prudent (and less stressful) choice.