The Election and the Stock Market

by Darwin on October 26, 2012

With the US Presidential election just weeks away, by now, you’re likely being bombarded with not only ads, but also, pundits surmising what a win or either candidate will do for various stocks, sectors or the stock market in general.  While seeking to silence my own personal bias (although admittedly, I am relatively agnostic on the impact of a win for either candidate and their impact to equities), here are some facts and resources you can check out for yourself:

  • Who is Actually Likely to Win?  Just about every day, there’s a new national poll being released, but we all know polls are skewed.  For instance, the samples sizes are often small, the polls occur across multiple days as news and sentiment is evolving and sample errors persist (for instance, women are more likely to answer a phone and respond to a poll question than men and women are also more likely to be liberal voters, thus skewing random phone poll results, right?).  So, that being said, over the past few election cycles, we’ve had the benefits of electronic markets where people are betting with their own money.  When you put your money where your mouth is, you’re much more likely to get an accurate result.  The two major online markets I follow are InTrade and the Iowa electronic markets (I linked to the US presidential race for your convenience).  As of the timing of this writing, they are within 1% of each other at around 62%, so it’s good to see they don’t diverge too much.  Finally, there’s a widely followed pundit who tries to estimate percentages based on likelihood of each state winning (hence, electoral votes) – 538blog.  He actually gives Obama a much better chance, now at 73%.  But then again, he works for the New York Times LOL.
  • Once They Win, What Will Change? Romney has promised that if he wins, he’ll repeal Obamacare on Day 1.  Well, that’s not going to happen.  Aside from the fact that it is now law and so many parts of it are already in motion, once you give the public something, it’s very difficult to take it away.  He then goes on to say that he’ll keep some parts of it and remove others.  So, to take a very bad piece of legislation and make it even worse by keeping the good stuff (presumably, the parts that benefit people) and removing the bad stuff (the costly parts, taxes, etc), then you end up with benefits and no way to pay for it.  In my mind, it would have to either be repealed altogether and start over completely or just leave it as-is and modify small parts of it.  I don’t think either will happen even if Romney wins.  If Obama wins, I image we’d see more of the same; because he’s had 4 years (including 2 with a supermajority in the House) to do as he pleases.  Without passing judgement on how the economy is now, who inherited what or why unemployment remains persistently high, I don’t see a major catalyst for change if Obama wins again.
  • Prior Stock Market Moves Following an Election – There are different opinions about whether it really matters who wins.  It’s tough to say because we don’t have a huge data set in modern times, and also, every election cycle has vastly different financial conditions that coincide with the election.  Not to mention, it matters quite a bit whether it’s an incumbent election cycle or a new cycle following the 8th year of a president.  The most commonly cited paper is here, which gave a 4% edge to Democratic presidents, but also said the returns don’t seem to correlate with or track the winner.  I know, confusing, but it’s described in further detail there.  My interpretation is that for any given election, it is probably inconsequential and not worth bothering to “bet” or invest in a winner since the standard deviation and random variability is likely to outweigh any benefit that should be repeated historically.
  • Are You In for the Long Term? Echoing my prior sentiment, in summary, I’m in the market for the long-term, especially in my retirement accounts, which have decades-long time horizons.  Personally, I find it to be totally silly and counterproductive to be shifting around asset classes in retirement accounts leading into and coming out of election cycles.  You are just as likely to be wrong as you are right.  People like to think they’re special and that they can predict things that others can’t.  Unfortunately, they’re not.  On average, we’re all average – minus the edge that Wall Street traders, high frequency traders and those who possess insider information hold over us.

 

Are You Trading the Election Cycle?

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