November 25, 2016

Steering the Ship Post Presidential Election

Yael Morowati

Irrespective of your political affiliation or who you voted for a couple of weeks ago, all of us can agree that there’s a particular suspense leading up to the inauguration that will take place on January 20, 2017.  Whether you’re a student, a millennial, a new parent, or a seasoned investor, we’re in the same boat with regard to the unpredictable financial outcomes of this year’s election. You may assume, like me, that a candidate’s party affiliation has a direct impact on your personal investments.  That’s just one of many misconceptions existing today, and you can rule that one out.

You may be scratching your head like me, but it turns out that when it comes to your personal investments, it doesn’t matter which party wins the presidential seat.  Princeton economics professors, Alan Blinder and Mark Watson, researched the period between an election and the inauguration of a new president and concluded that, “It gives a slight edge to incoming Republicans, despite the fact […] that stock prices actually rise much faster under Democratic presidents than under Republican presidents.”

Capital Economics’ chief markets economist, John Higgins, argued that both poor and good stock performance in the year before or after an election had less to do with the president’s party and more to do with what was going on in the actual economy. That actually makes sense. Bespoke Investment Group says that stocks lose 1% when a Democrat wins while they rise 4% when a Republican takes office.  In the same vein, party affiliation doesn’t suggest which candidates might help or hurt your investments.

None of us can predict what the American financial markets will look like in a year, let alone four years.  Even though history repeats itself, and while trends shed a certain light on what may happen, they are not written in stone and certainly not with regard to the stock market.  For the past 182 years, financial markets have ebbed and flowed just like the rest of the American economy. Even though most of us would like an instructive guide on how or where to invest, one thing is clear: putting a little away every day is the one thing you can do to feel more secure in your future.

History suggests that the market responds better to predictable outcomes. From the beginning of the 2016 election, we can agree that nothing was obvious.  Furthermore, Trump has been the most unpredictable candidate and yet he pulled through.  However, if there’s one thing the market hates, it’s uncertainty.  This means something a little different than you would expect.

President Obama isn’t running for reelection. Regardless of party affiliation, departing two-term presidents create a void that financial markets find unsettling.  In short, markets prefer presidents seeking reelection.  Incumbents are also favored, because, as they attempt to get reelected, they tend to promote market-friendly policies.  According to Bloomberg data and Bankrate, the Dow Jones industrial average rises an average of 13% when the presidential race does not include an incumbent up for reelection.

However, once again, trends can’t predict all anticipated outcomes. Since 1833, the Dow Jones industrial average has gained an average of 10.4% in the year prior to a presidential election and 6% in the election year. In contrast, the first and second years of a president’s term see gains of 2.5% and 4.2%.  The Dow racked up an impressive 27% in the first year of President Obama’s second term, and 7.5% in year two. Last year, which was supposed to be the strongest of the cycle, saw the Dow industrials drop 2%.

So, like me you may be feeling a little powerless, but the good news is that even during this unpredictable phase, you can cling to something to feel empowered and to steer your own ship. There has never been as better time to save and with Clink, you’ll be one step ahead of the crowd.

 

 

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