Does it really matter who won the election?

Does it really matter who won the election?

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Watching the results of the US presidential election this month has proved akin to observing a train crash, in that however much I may have preferred to have done something else, the spectacle has proved oddly compelling viewing.  I briefly studied the subject while a student some decades ago and have not found that time has made the process much easier to understand.  Given that the founding fathers effectively started from a blank sheet of paper, it seems astonishing that apparently they did not consider the possibility that there could be an equal number of electoral college votes for two candidates, resulting in a draw.

Fortunately, this does not appear to have happened in 2020, although it remains to be seen how effective the incumbent’s resort to the courts to resolve the question of who won will prove.  It was intriguing, as an outsider, to learn that in the US there is such a thing as an ‘election lawyer’, a specialism which there is presumably enough work to sustain.  Still, an election, however it may turn out, surely represents a better way of changing government than pretty well all of those alternatives which we observe elsewhere in the world.

American voters reportedly regarded the economy as one of the principal issues in this year’s elections and this is commonly the case across the developed world.

So given the attention paid by candidates and voters to economic policies, does the party of the successful candidate really have that much impact on what matters to investors, which is how the stockmarket performs during their term of office? The answer, it appears, is that it does not.

Data source: DFA Returns 2

The chart above shows the annualised return after inflation of an index representing the US stockmarket (as measured by the S&P 500 index) since the election of Richard Nixon in 1968 to that of (probably!) Joe Biden in 2020.  Republican presidents are indicated in red and Democrats in blue.  To me there is no obvious correlation between market returns and the political complexion of the President over that period.

However, we should not really be surprised by this.  Investors value the businesses whose shares make up the stock market on the basis of what they expect from its profits over the long term.  US Presidents are elected for a mere four years, although they may stand for a further term after that.  For a business however, eight years is a short period of time and regardless of their other differences, the candidates of both parties believe in the benefits of capitalism.  They also, while it may not always seem to be the case, believe in the democratic process.

While some investors and portfolio managers may seek to take advantage of expected future events and the market’s reaction to them, this is not as easy as we might hope.  It is said that markets do not like uncertainty but uncertainty is inherent in any system for valuing assets which depends on at least some element of prediction about the future.  As I have said before, to make any predictive strategy work effectively, it is necessary to predict not only the event correctly but also the market’s reaction to it.  And the market comprises a lot of other investors, most of whom are trying to do the same.

Coincidentally, within days of having (almost) the result of the US election, use of a potential vaccine for coronavirus and a consequent prospect of a return to normality pushed up the prices of businesses in sectors expected to benefit.  Meanwhile those businesses which have flourished due to restrictions on travel saw falls as investors switched their capital to where they perceive there to be greater returns.

As always, the release of new information rapidly impacts on share prices so by the time you catch something on the evening news or in the newspaper, prices have long since absorbed its anticipated impact.  For the long-term investor, which should be all investors, making decisions on the basis of news flow is unlikely to deliver the optimum long-term outcome.  Instead, the focus should be on your own goals and the degree of risk that you are prepared to take to achieve them.