It’s natural to run from danger, and if you have strong feelings about presidential politics, this year’s choice probably looks pretty dangerous to you, no matter which side you’re on. You might even be tempted to do something about it… something that involves your retirement account or your college funds. To put things in perspective, you need to know the stock market has favored Republicans in the past over Democrats but wins by the Incumbent Party (which would be the Democrats in this election) have delivered returns that are almost the same.
While this may seem straight forward, “It’s really hard to predict the outcome of politics, and even if you get the outcome right, it’s even harder to predict the market reaction,” says Eric Veiel, head of equity management at the T. Rowe Price family of mutual funds.
In fact, getting an “edge” in your investments is so hard as to be impossible. If it were possible, some whiz kid techie out there would have built a data mining algorithm to sift through social media, find the winner in advance, and arbitrage away all the extra profits that one could have garnered.
“It may be tempting for investors to try to link presidential election results to market outcomes, but there are really no consistent relationships between party affiliation and long-term investment success,” says Veiel. That’s why we caution clients not to make investment decisions based on expected election outcomes.
The reason that investing offers a prospective return at all is precisely because of the perceived danger or “risk.” If it weren’t risky, everyone would be doing it and they would have sopped up all the excess returns already. That’s why fundamental factors, such as oil prices, corporate earnings, and monetary policy usually outweigh political developments. While sectors such as health care and energy could be affected by proposals of leading candidates, Congress, the Federal Reserve and the commodities markets tend to have more power over these factors than any one man or woman in the White House.
Remember, this is only one election among many you will see and hopefully vote in during the course of your life. Investing for retirement and saving for college are long term goals, so the best thing you can do between now and November 8 is to make a plan for your future and vote with your ballot—not your investment account.