Don't try to time elections
Why you should resist the urge to make predictions when there's a disconnect between the economy and security prices.
Ian Tam: With the US presidential election fast approaching, you as an investor might be tempted to tactically adjust your portfolio in anticipation of what might happen in the wake of a Biden or Trump administration. But does it make sense to do this? Let’s see what the data says.
This chart shows what would happen if you had invested $100,000 US dollars into the S&P 500 Total Return index on October 31st in each presidential election year since 1972. Each line represents a different presidential term with the president highlighted on the right. You can see that over the medium term, or 48 months, the results vary dramatically.
For those analysts among us, an initial inclination might be to try to tie the performance of the index to the party in power. Let’s have a look again with this in mind.
This chart is the same as the first, but this time showing the political affiliation of each president. A democratic president is outlined in Blue, and a republican president is outlined in Red. Again, the results are heavily mixed.
So what do we make of this dog’s breakfast? Nothing. In a recent column my colleague and Morningstar veteran John Rekenthaler commented on the idea that presidential elections don’t affect the economy, or stock prices as much as we think.
John looked at the Real GDP growth rate from January 2014 to December 2020, the last 3 years of president Obama’s term, and the first three years of president Trump’s. Although the two presidents had radically different policies, the growth rates were similar at 2.4 per cent annualised during the last three years of Obama’s term, and 2.3 per cent during the first three years of Trump’s term.
Remember that economic conditions don’t often reflect stock prices. The most glaring example of this is what we are going through right now. Despite bleak economic conditions, the S&P 500 continues to remain resilient, showcasing the disconnect between the economy and security prices. So what can you do? The simple answer is nothing. Sticking close to your risk tolerance and maintaining discipline in your portfolio will likely afford you better results in the long run rather than guessing who the next president is.
For Morningstar, I’m Ian Tam.
