With the political cycle gearing up, there is a great deal of sound and fury in the media about presidential candidates and their effect on business and the markets. The presumption is that future economic and financial performance is highly contingent upon which party occupies the White House. Here we review what academic research and years of experience tell us about elections and financial markets.
Read Wittman’s full Q2 2015 CIO Insight: Betting on the Electoral Cycle Is Bad Business
- “Betting” your portfolio on electoral outcomes is a fool’s game. Not only would you have to predict the winner of the election, but you would also have to accurately gauge which markets, sectors, and individual securities are likely to benefit from your anticipated result.
- Next, you must get the timing of your trade right. For example, consider that if you are able to accurately divine answers to the questions above, other investors are likely to have done so as well. As a result, the market likely has already discounted the probability of your candidate winning.
- There is a great deal of academic research examining the relationship between the economic cycle and the political cycle. The conclusion? No one party (Republican or Democrat) is consistently better or worse for stocks, bonds, or economic sectors than the other.
Even if we knew the electoral result ahead of time, this is not sufficient for a viable investment strategy. Instead, we would argue that investors would do well to tune out the electoral echo chamber and focus on developing a risk-appropriate, sustainable saving and investing plan.
Diversification does not assure a profit nor does it protect against loss of principal.
The opinions expressed are those of Scott Wittman, CFA, CAIA, and are no guarantee of the future performance of any American Century Investments portfolio.
For educational use only. This information is not intended to serve as investment advice. Past performance is no guarantee of future results.