How will the markets react to the election? Do you buy if Romney wins and sell if Obama is re-elected or do the opposite? Most people’s answer to that questions depends upon their particular political persuasion. However, if you take off the political glasses what does the choice look like?
There have been a lot of statistics thrown around lately regarding the impact on the markets of who wins the white house. In today’s WSJ Ahead of the Tapecolumn by Spencer Jakab, a study by Barclays starting in 1929 shows that the market has risen 10.8% annually under Democrats and 2.7% under Republicans. According to that data we should all want the President to win. However, “there are lies, damned lies, and statistics” as Mark Twain said. Economic policies enacted by governments can take years to implement and the consequences (both good and bad) can be felt years down the road. The growing debt burden as the prime example. Sometimes Presidents preside during booms and their followers reap the aftermath. Some Presidents take office during bear markets and the markets have nowhere to go but up and some encounter the exact opposite. Politicians of course will always take the credit for the good and assign blame for the bad. Trying to separate and assign the real cause and effect is a battle that constantly being waged.
There is no doubt that the GOP is the more business friendly party in general and that is especially true this time around. So does that mean that the market will take off if Romney is elected? It’s hard to say. On the surface it would seem that a more business friendly administration would result in strong stock market gains. However, the past four years have seen anemic economic growth but good stock market gains. I have seen all too many investors sit out the last four years and miss out on the gains because of their political beliefs. My main point is that it when the entire historical record is examined period by period it shows the futility of trying to time the markets for political reasons. It is far better to stick with a proper asset allocation through thick and thin despite one’s political beliefs.
Depending on the election result and market conditions, we are considering making a short-term trade based upon the election results in order to take advantage of the possible emotional reactions many might have to the election outcome. The WSJ article previously mentioned cites a study we have been looking at that shows the market tends to do well in November if the challenger is elected and can be the second-worst month of the year if the incumbent is re-elected. The election is too close to call ahead of time to make a decision yet but we are watching and waiting to see if an opportunity develops…
Written by Nathan White, Chief Investment Officer of Paragon Wealth Management