“Presidential elections typically don’t have a long-term effect on market performance.”
Vanguard
“Trying to make investment decisions based upon the outcome of presidential elections is unlikely to result in reliable excess returns for investors.” Dimensional Fund Advisors
The third quarter was a pretty good one, both domestically and internationally, as evidenced by the numbers below. Looking at broad market indices, emerging markets outperformed all other major markets during the quarter. The US equity market lagged developed markets outside the US, which is contrary to recent history.. The value effect was negative in the US and emerging markets, but positive in developed markets outside the US. Small caps outperformed large caps in the US and in developed markets outside the US, but underperformed in emerging markets.
| Data Series % | 3 Months | 1 Year | 3 Years | 5 Years | 10 Years |
| S&P 500 | 3.85 | 15.43 | 11.16 | 16.37 | 7.24 |
| Russell 2000 | 9.05 | 15.47 | 6.71 | 15.82 | 7.07 |
| Russell 2000 Value | 8.87 | 18.81 | 6.77 | 15.45 | 5.78 |
| MSCI World ex USA | 6.29 | 7.16 | 0.33 | 6.89 | 1.88 |
| MSCI World ex USA Small Cap | 8.00 | 13.50 | 4.15 | 9.72 | 4.11 |
| MSCI Emerging Markets | 9.03 | 16.78 | -0.56 | 3.03 | 3.95 |
| Bloomberg Barclays Treasury Bond 1-5 Yr | -0.19 | 1.54 | 1.41 | 1.10 | 2.98 |
| BofA Merrill Lynch 1-Year US Treasury | 0.06 | 0.54 | 0.35 | 0.33 | 1.53 |
Presidential Elections and the Markets
I was prepared to dedicate this newsletter addressing the benefits of rebalancing. However, 2 very good pieces on presidential elections and markets came out in the past 2 weeks by both Dimensional Fund Advisors and Vanguard. Given the perceived anxiety related to the election and the candidates, I thought it would be wise to focus on this since the election is so close and controversial. As you will be able to see, I am not taking sides, and considering only data versus ideology.
I am going to embed the Dimensional piece within this newsletter, but I think the main message of both pieces is very important no matter what side of the aisle you sit.
- Stock Market Volatility tends to spike a bit in presidential election years, but typically stops increasing shortly after the election is over.
- Going back to 1853 according to Vanguard research, stock market returns are virtually identical no matter which party controls the White House.
- Presidential elections have had little impact on bond markets as well.
- There is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in order pursue investment returns.
- Many factors influence market behavior other than the party in office, including market valuations, globalization, technology, demographics, the Federal Reserve, the economy, and unforeseen events such as wars and natural disasters.
- The efficiency of the markets means expectations at any point in time are already reflected in market prices.
- The new President’s economic policies may not be fully enacted due to Congressional involvement, and no one knows how such policies will influence the markets.
Here is a link to the Vanguard piece, along with a chart they referenced.. https://goo.gl/6gpzW1
Following is the piece that Dimensional just published. Please call with any questions. I will send a follow-up newsletter discussing rebalancing soon.
Presidential Elections and the Stock Market
October 2016
Next month, Americans will head to the polls to elect the next president of the United States, along with numerous other positions. While the outcome is unknown, one thing is for certain: There will be a steady stream of opinions from pundits and prognosticators about how the election will impact the stock market. As we explain below, investors would be well‑served to avoid the temptation to make significant changes to a long‑term investment plan based upon these sorts of predictions.
SHORT-TERM TRADING AND PRESIDENTIAL ELECTION RESULTS
Trying to outguess the market is often a losing game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants. This includes expectations about the outcome and impact of elections. While unanticipated future events—surprises relative to those expectations—may trigger 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 systematically benefit from trying to identify mispriced securities. This suggests it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after a presidential election.
Exhibit 1 shows the frequency of monthly returns (expressed in 1% increments) for the S&P 500 Index from January 1926 to June 2016. Each horizontal dash (in gray) represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months where returns were between 1% and 2%). The blue and red horizontal lines represent months during which a presidential election was held. Red corresponds with a resulting win for the Republican Party and blue with a win for the Democratic Party. This graphic illustrates that election month returns were well within the typical range of returns, regardless of which party won the election.
Histogram of Monthly Returns, January 1926–June 2016
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.
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. Exhibit 2 shows the growth of one dollar invested in the S&P 500 Index over nine decades and 15 presidencies (from Coolidge to Obama). This data does not suggest an obvious pattern of long-term stock market performance based upon which party holds the Oval Office. The key takeaway here is that over the long run, the market has provided substantial returns regardless of who controlled the executive branch
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.
CONCLUSION
Equity markets can help investors grow their assets, but investing is a long-term endeavor. Trying to make investment decisions based upon the outcome of 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.
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