Every four years there is a common question facing us: which candidate is best for the financial markets or the economy? While the battle between Trump and Clinton is incredibly polarizing, this election cycle is no different. Despite strong beliefs from the American people, the results are anything but conclusive.
Why is this?
First, just because a new President takes office does not mean his or her policies have been implemented. The financial markets continue to chug along each day.
Additionally, the new President must work with Congress to gain approval for their policies. Sometimes Congress is aligned with the President, while other times there is split control.
Furthermore, once legislation has been enacted, it still takes quite some time to be funded and implemented so the economic impact can filter through the economy.
For these reasons, and many more, the person in the White House inherits the previous administration’s economy and leaves their legacy upon the next administration.
As such, the success of one administration or political party over another is blurry at best. Despite this inconclusiveness, there is one interesting and noteworthy observation that has more to do with investor psychology than anything else.
A study published by professors Yosef Bonaparte (University of Colorado), Alok Kumar (University of Miami) and Jeremy Page (Brigham Young), in conjunction with survey firm Gallup, evaluated the investment behavior of more than 60,000 investors between 1991 and 2002. Their research controlled for major demographic factors, such as age, race, gender, education, and wealth and income level.
The conclusion was that if a person’s preferred candidate wins the White House, they feel more confident about the economy, stock market and stock valuations. In the process, they put more money in stocks, and accept more portfolio volatility—regardless of the true fundamentals for investing attractiveness. Additionally, they favor domestic companies over foreign ones and tend to trade less.
Conversely, if someone’s chosen candidate does not win the Presidency, they assume the new administration will deliver subpar results. As such, they opt for lower volatility investments and tend to trade more often. In the process, they ignore valuations, GDP growth and other fundamental metrics which are more logical to assess.This noted bias was observed for both Republican and Democratic voters.
Since 2000, this trend has become even more pronounced amidst a severely polarized climate. As a result of this political bias, investors who put more money into the stock market do so assuming their political affiliation is better for the economy. Although their performance was generally good, in reality, it had more to do with their asset allocation and the fact that stocks typically go up over long periods of time.
Conversely, the investors who pull back from the stock market because their candidate lost experience worse returns. Again, this is not because of the political party in power, but rather the fact that they chose an asset allocation that most likely will produce lower returns regardless of who is in the White House.
What can we learn from this?
Focus on investing fundamentals, not the Presidency. Regardless of who is in the Oval Office, HEB will still sell food, beer and other items for daily life. As such, it makes more sense to analyze things like sales, cash flow, earnings and profit margins in determining the soundness of an investment. Remember, the smart investor recognizes they are buying a business—not day-trading some random ticker symbol.
Delving into the financial statements of a company will open your eyes as to how good or bad it is. Predictable and consistent companies are much easier to evaluate and much more resilient throughout differing economies.
Determine what asset allocation works best for you. Do not allow this to be affected by political outcomes. Adjust your asset allocation based upon your need for income, need for growth, tolerance for volatility, and time frame.
Trade as little as possible. The more you trade, the more you pay in commissions and taxes.
Get sincere input from people who disagree with you. Although this can be painful, it can expose emotional flaws in our thinking.