As the election nears closer, more and more people are speculating what the result could mean for the stock market. Importantly, however, elections are not referendums on stocks. If history is any guide, one candidate winning or losing likely doesn’t mean much in the market’s eyes. The stock market has performed well under both parties:
Predicting outcomes is hard
In August, we suggested there were signs that the market is anticipating a Biden victory. Since then, sectors thought to benefit from a Biden presidency, such as clean energy, have surged. Yet, there’s danger in forecasting sector performance based on who’s in the White House. Energy, real estate, and financials, three industries that were expected to benefit most from a Trump presidency, have been among the worst performing sectors in the stock market since he won the election in 2016. Technology, generally thought of as a more liberal sector, has done the best:
So there’s really no point in trying to predict which sectors will perform the best over the next four years based on who’s in the oval office. If you sense yourself having a personal bias against one party or the other, and think you should align your portfolio with this bias, think again.
Tips for leaving politics out of your portfolio
Political biases are best left out of your portfolio. Here are some tips for doing just that:
- Take a hands off approach to your portfolio. If you work with a professional it’s unlikely they are factoring politics into your portfolio. There’s no reason to encourage them to do otherwise. If you manage your investments yourself you can still be hands off in this way: the allocations and strategy you set for yourself at the beginning of the year likely wasn’t influenced by politics. Don’t change them now based on political beliefs.
- Be informed by facts, not analysis. In this article we simply presented data that shows Presidents haven’t really impacted market performance one way or the other. We don’t know why that’s the way it is and it’s not our goal to find out (is it even possible to find out?). Facts are informative, whereas analysis is usually trying to persuade you in favor of an argument.
- Set up a play money account. These types of accounts serve a very useful purpose: you can scratch your trading itch without blowing up your long-term portfolio. This account should obviously be kept very small, and not exceed more than 5% of your investable assets.
- Write your predictions down on paper and see the results for yourself. Start a record book and start logging predictions. You can start with who you think will win the election and then predict the subsequent stock market reaction. Then forecast the market’s performance for the next 3, 6, and 12 months. Have as much fun with it as you’d like to, and compare what happens to your predictions.
Markets are gonna market
The market is going to do what the market is going to do. A number of different factors impact the market but it’s very hard to determine what those factors are. What’s more, it’s even harder to determine when or how those factors will impact the market. Take the unemployment rate for example, it’s higher now than anytime in the last five years, and yet the stock market is near an all time high. Stock market returns do not appear to be higher or lower depending on which party is in control of the White House. Keep that in mind as the election gets closer and the noise coming from the media gets louder.
If you’re tempted to make major changes to your portfolio based on the election, take a step back. Make sure you’re consuming fact-based information and not conjecturing. If a play money account will help you stay on track with your long-term investment goals, consider setting one up with a small amount of money. Lastly, see just how hard predicting outcomes is; record your forecasts in a notebook and see how accurate your guesses end up being.
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