Many investors are worried about the US election’s effect on the stock market.
One school of thought is a Biden victory could lead to measures that would hit businesses. Another asserts the stock market prefers Republican victories.
What does the data say?
The logic of efficient markets is that anticipated events do not impact prices. If everyone knows the winner, then the prices will adjust long before the actual election. Alternatively, if a dark horse candidate wins, the market might move significantly. This is because prices had embodied a different candidate winning. A good example would be President Trump’s 2016 victory causing stock markets to rise.
One of America’s main stock indices is the S&P 500. During election years this has typically performed in a similar manner to previous years.
In addition, while the market has done slightly better under Republican presidents it is not significant enough to form part of any robust investment strategy. There is a modest return differential between presidential election years and non-election years. But this is small and could be attributable to randomness.
What is the upshot of this?
It is as important as ever to maintain perspective and discipline and ignore the noise.
Few events can be as uncertain, and as exhausting, as the run-up to a US presidential election. Many, including some in the investment management business, offer market predictions based on which candidate or party may be victorious.
We believe such forecasts, like most-short term predictions, are unreliable. Investors should let history guide them. While this is not a guarantee of future results, it allows us to form some reasonable expectations about the future.
Discounting history because ‘this time is different’ is an investing delusion that has preyed on many.