Next month, Americans will head to the polls to elect the next president of the United States.
While the outcome is unknown, one thing is for certain: there will be a steady stream of opinions from analysts and forecasters about how the election will affect the stock market. As we explain below, investors would be well-served to avoid the temptation of making significant changes to a long-term investment plan based upon these types of predictions.
SHORT-TERM TRADING AND PRESIDENTIAL ELECTION RESULTS
Trying to outguess the market is often a losing game. Current investment prices offer an up-to-the-minute snapshot of all available information. This includes expectations about the outcome and impact of elections. While unexpected future events may trigger investment price changes in the future, the nature of these surprises cannot be known by investors today.
As a result, it is difficult, if not impossible, to consistently benefit from trying to identify mispriced investments. Therefore, it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after a presidential election.
LONG-TERM INVESTING: BULLS & BEARS ≠ DONKEYS & ELEPHANTS
Predictions about presidential elections and the stock market often focus on which party or candidate will be “better for the market” over the long run. The graph below shows the growth of one dollar invested in the S&P500 Index over nine decades and 15 presidencies (from Coolidge to Obama). This data does not show an obvious pattern of long-term stock performance based on whether a Democrat or a Republican is in the White House. The key takeaway here is that over the long run, the market has provided significant returns regardless of who controlled the executive branch.
Exhibit 2. Growth of a Dollar Invested in the S&P 500, January 1926–June 2016
[Source: Dimensional Fund Advisors LP]
Equity markets can help investors grow their assets, but investing is a long-term endeavor. Trying to make investment decisions based upon who you think will win the presidential elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in order to pursue investment returns.