Presidential Election Reflection

Another election day has passed, though the excitement may be far from over. It is hard to know what will happen between now and the inauguration, let alone what awaits us beyond.

One thing is for certain, though, and that is attention-grabbing headlines about what it all means for the markets. And whether these headlines portend doom and gloom or a bullish bonanza, we offer the following calming insights to help you weather the storm.

• Election outcomes and market outcomes are not correlated. Consider this research by Fidelity that shows that the S&P 500 has produced very similar returns under Democratic and Republican presidents, and it does not matter which party controls Congress, either. Even when we look more granularly at individual sectors, there is not much of a difference. In fact, in every presidential election year since 1976, every sector has outperformed at some point in years the White House has gone blue and in years it has gone red. The reverse has also been true. Every sector has underperformed amid both parties’ victories.
• Cause and effect are rarely as direct as we might hope or fear. Please apply this point to any temptation you may be feeling to alter your investments because “X” has just happened, or in case “Y” seems about to. As the election plays out, pundits will be proclaiming they can predict how the markets will respond to new socioeconomic policies coming out of a new administration. At least in terms of tomorrow’s market prices, they do not know. They cannot know. There are simply far too many interacting interests to make the call.
• It is much easier to explain an outcome than to predict it. A few years ago, financial writer John Jennings wrote in Forbes about how scientists have detailed models for explaining why volcanoes occur. But they still cannot predict each eruption. The same can be said for financial markets. We have excellent models for explaining a market’s overall factors and forces. But our ability to predict its individual events or specific moves remains as elusive as ever.
• Elections come and go. Your investments last a lifetime. As U.S. voters, we have the opportunity to select our next president every four years. As investors, we are best served by measuring the balance of power in our portfolio across decades rather than years. As Dimensional Fund Advisors has demonstrated in this excellent illustration, “for nearly 100 years of U.S. presidential terms [the data] shows a consistent upward march for U.S. equities regardless of the administration in place.”