With the Republican National Convention and Democratic Conventions this month, 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. But is it?
Media reports may lead you to conclude that your financial decisions should be influenced by electoral outcomes, when in fact nothing could be further from the truth. Our own process relies on macroeconomic and financial fundamentals to guide our investment decisions—electoral outcomes only enter into our decision-making process indirectly, through their demonstrated effects on economic and market fundamentals.
Given these conditions, let’s review what academic research and years of experience tell us about elections and financial markets:
1. “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.
2. 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, any potential benefit from your election trade may well have already been arbitraged¹ away! Said differently, the market likely has already discounted the probability of your candidate winning. This means that even if you guess right and can predict the political and economic winner of the election, you may not reap any financial benefits. In fact, it is possible that the market may move in the opposite direction depending on how much was already discounted in asset prices.
3. There is a great deal of academic research examining the relationship between the economic cycle and the political cycle. And the conclusion of virtually all of it is the same: No one party (Republican or Democrat) is consistently better or worse for stocks, bonds, or economic sectors than the other—at least with any degree of statistical significance.
It’s Not Who Wins, It’s How You Play the Game
Here is what we can say with a high degree of certainty: 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.
Certainly, we believe a balanced, diversified approach gives investors the best opportunity to ride out volatile market conditions and stick to their financial plan. One reason this is true is that it takes prediction out of your investing equation and puts the focus on the process underpinning your ultimate financial success. And in any event, we believe a well-diversified portfolio is one best positioned to succeed under a range of financial, economic, and market conditions, as well as electoral outcomes.
¹ Arbitrage is the purchase and nearly simultaneous sale of assets in different markets to profit from momentary price discrepancies.
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.