With the election a constant feature of the news, frequently in the context of how it may affect investment portfolios, many people offer market predictions based on which candidate or party might win.
However, in my view these predictions can be unhelpful - markets will already have priced in the likelihood of who will be the next incumbent. Investors should be guided by long term historical context and not short-term predictions.
Vanguard looked at more than 150 years of asset returns to see whether a relationship with electoral events existed. They examined not only returns under Republican and Democratic presidents, but also whether election year uncertainty exposed markets to lower returns and/or higher volatility.
While historical performance is not a guarantee of future results, 150 years is a large enough data set with which we might form some reasonable future expectations. Discounting the past because, somehow, ‘this time is different’ is falling prey to a classic investing fallacy.
Returns and volatility Based on a portfolio comprising 60% shares and 40% bonds, they did find a modest difference in returns depending on whether a Republican or Democrat sat in the White House. However, the difference is statistically insignificant, and it offers little to no value as part of an investment strategy.
They also found that a modest return differential exists between presidential election years and non-election years. But, again, this result is statistically insignificant and likely attributable to randomness, or ‘background noise’, as the chart below demonstrates. History suggests that investors shouldn’t be concerned about material differences in returns under different political administrations.
Past performance is not a reliable indicator of future returns.
Source: Vanguard calculations of a 60% equity, 40% fixed income portfolio based on data from Global Financial Data as of December 31, 2019. The 60% equity portion is determined by the GFD US-100 Index and the 40% fixed income portion by the GFD US Bond Index, as calculated by historical data provider Global Financial Data. Returns are calculated in US dollar terms and exclude the impact of fees. Years are categorised based on which political party occupied the White House for the majority of the year.
Also, the outcome of an election is only one of many inputs to the market. Dimensional Fund Advisors also looked at market and economic data for nearly 100 years of US presidential terms and it shows a consistent upward march for US equities regardless of the administration in place – showing the benefits of having a long-term investment approach.
A recent Ken French article re FAANG* stocks also makes an interesting read - French starts the article saying
“Investment returns have two parts: the expected return and the unexpected return. The expected return is the best guess of what will happen based on all the information currently available. The unexpected return is the surprise, the difference between what does happen and what was expected. Investors should base their portfolio decisions on expected future returns, not recent realized returns, and the two can differ by a lot”
This quote pretty much sums it up for me – holding the whole market is the closest we can get to all the information currently available and thus is the only logical way of capturing future expected returns.
Finally, it’s important that you don’t lose sight of your personal investment goals and stick to your own long-term strategies. Financial markets are incredibly complex systems affected by a great many different external variables whose levels of importance depend on market valuations, business cycles and investor sentiment, just to name a few.
Most events that might lead an investor to think about straying from a well-considered long-term strategy are single-issue events. US presidential election-year politics, though, touch upon multiple issues to inform four years of policymaking. They can also have global ramifications.
Politics, even US politics – is just one of these many variables, offering little to no insight in isolation and being well diversified is likely to lead to the best outcome rather than trying to make timing calls. Investing now is a good a time as any.
This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product.
Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
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