Every four years the air is ripe with speculation about what the presidential election—not to mention the new administration—will mean for the stock market. Will the Dow sink, swim, or soar?
While we can’t know the precise answer to this question, we do know one thing: For the average stockholder, attempting to game the market by radically reallocating your portfolio holdings is a bad idea at any time. But let’s look at some telling statistics about presidential elections. True enough, since the end of World War II, the market has risen in 12 of 16 election years. If that sounds like the market has a good chance of climbing this year, well, you’re right. But that would be no freak event. Standard & Poor’s 500 Index has historically gone up in about 12 of any 16 years. But does it matter which party wins? Studies reported in Bloomberg News prior to the 2012 election revealed that the annualized return of the S&P 500 throughout the past 23 years of Democratic administrations has been 11 percent. Compare that to the 2.7 percent annualized return during the 28 years of Republican administrations. You might want to think twice before rolling the dice on party control, because in 2008, a Democrat won, and the stock market sank in the months following the election; in 2004, a Republican won, and the stock market soared.
What drives these market trends? According to Ned Davis Research and T. Rowe Price, the markets seem to like consistency. In the post-World War II period, when the incumbent party won elections, the market gained an average of 9.2 percent for the election year versus only a meager 2.2 percent when the challenging party won. But what’s happened in the past may have limited bearing on stock market performance over the next couple of months, and beyond.
John C. Bogle, founder of the Vanguard Group and author of The Clash of the Cultures: Investment vs. Speculation, says presidents influence markets. But, he adds, making bets based on presidential cycles is akin to speculating on stocks using tea-leaf readings or whether the NFL or AFL won the last Super Bowl. All of these “strategies” are parlor tricks, says Bogle, “statistical noise.”
What it comes down to is common sense: “The key to profitable investing is buying and holding a well-balanced portfolio,” says Bogle. “Market timing rarely, rarely works.” Using figures from Morningstar, he points out that the average U.S. stock mutual fund—whose manager does considerable buying and selling—underperformed the S&P 500 Index by 1.3 percentage points per year, over the past 15 years. Even more telling, the average investor—who tends to swap out almost a third of his portfolio each year—underperformed the average mutual fund by another 2.2 percent a year.
How can you beat the average investor? Invest your money largely in low-cost, broad-market index funds, says Bogle. Make sure you have a well-rounded portfolio, with stocks—U.S. and foreign, large- and small-company —and bonds. When the going gets rough and holdings tumble, don’t be so quick to sell. Trust that the market will come back, as it always has done.
Yes, who is in the White House, the President, as well as Congress, can affect the market. “We need to encourage our leaders, whichever ones are in power, to think long-term about the strength of the economy, for ultimately, the markets move with the economy,” says Bogle. “Strengthening the economy means tackling the federal deficit, improving infrastructure, creating jobs, and revamping a healthcare system that is costing our nation way too much.”
Such policies take time. “Patience,” says Bogle, “rather than taking wild bets on elections, is how to profit from the markets.”