Presidential Elections and the Stock MarketSubmitted by Fountain Financial Associates | Financial Advisors on October 24th, 2016
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 pundits and prognosticators about how the election will impact the stock
market. Here are a couple of reasons to remember that investors would be well-served to
avoid the temptation to disrupt a personally-tailored, long-term investment plan based upon
these sorts of predictions.
1. Short-Term Trading and Presidential Election Results
Trying to outguess the market is usually a losing game. Current market prices offer an up-to the-minute
snapshot of the aggregate future 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.
2. 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 graphic on the front 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.
Equity markets have historically helped 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 outcomes. 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 a disciplined
investment process, rather than trying to outguess the market, in order to pursue investment
and financial planning success.
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