Elections

Blue Wave or Red Tide: What Is Best for The Market?

I went to early vote last Friday. It was mid-morning and the wait was nearly an hour. For some reason, folks seem extra motivated to participate in our representative democracy in this mid-year election. In fact, according to The Texas Tribune, early voting totals across Texas are only slightly behind where they were during the 2016 Presidential election, and more than double the number seen in the 2014 mid-terms.

While we won’t know the outcomes of the elections until next Tuesday night, one thing we can count on is that plenty of political advertisements, opinions, and prognostications will be shared in the days to come. Pundits will want you to believe that this election, unlike all before it, is the most important vote you will ever cast. The results, they claim, will have lasting impacts on the economy, society, and even the planet.

In financial circles, this talk will almost assuredly include how the composition of the House and Senate could move markets. But should you be worried about how this mid-term election will impact your portfolio?

Deadlines, Elections, and Markets

Exhibit 1.

Exhibit 1.

Hardly a day goes by lately that one of the candidates for President (okay, mostly just one of the them) doesn't do or say something that makes you shake your head. Just this week, the "Donald" got confused and encouraged a group of Florida voters to head to the polls on November 28, only three weeks after the actual election! 

To help you avoid being disenfranchised, or worse, here are a couple of important upcoming dates to keep in mind:

Monday, October 17 – There are a number of deadlines next Monday.

Final Deadline for Individual Federal Income Tax Returns: nationwide final deadline for filing an individual federal income tax return for tax year 2015 after having filed for an extension. Extensions also apply to:

  • Removal of Excess Contributions and Roth IRA Conversion Recharacterization: last day to remove excess retirement contributions or to recharacterize a Roth IRA conversion from 2015.
  • SEP and SIMPLE IRA Contributions: 2015 contributions for Qualified Retirement Plans (QRP), Simplified Employee Pension Individual Retirement Account (SEP IRA), and Employer Savings Incentive Match Plan for Employees (SIMPLE) IRA.

If you have questions about these retirement issues, get in touch today to discuss your situation.

Tuesday, November 8 – Election Day, even in Florida.

Understandably, the election is causing consternation for many of the folks I talk to.  Elections add uncertainty, and uncertain markets act, well, uncertainly. We won’t know for sure for a few more weeks, but recent polls have increasingly indicated that the Democrats will keep the White House. Barring a WikiLeaks trove of Hillary’s lost love letters (or emails) from Vladimir Putin, maybe it’s time to look back at some of the items in President Obama’s last budget for clues to what may be coming down the pike and plan accordingly.

For some insight into elections and their impact on markets, the following Issue Brief[i] shows how making investment decisions based on the outcome of presidential elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome will likely be the result of random luck. At worst, it can lead to costly mistakes.


Presidential Elections and the Stock Market

Next month, Americans will head to the polls to elect the next president of the United States. While the outcome is unknown, one thing is for certain: There will be a steady stream of opinions from pundits and prognosticators about how the election will impact the stock market. As we explain below, investors would be well‑served to avoid the temptation to make significant changes to a long‑term investment plan based upon these sorts of predictions.

SHORT-TERM TRADING AND PRESIDENTIAL ELECTION RESULTS

Trying to outguess the market is often a losing game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants. This includes expectations about the outcome and impact of elections. While unanticipated future events—surprises relative to those expectations—may trigger price changes in the future, the nature of these surprises cannot be known by investors today. As a result, it is difficult, if not impossible, to systematically benefit from trying to identify mispriced securities. This suggests it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after a presidential election.

Exhibit 1 (above) shows the frequency of monthly returns (expressed in 1% increments) for the S&P 500 Index from January 1926 to June 2016. Each horizontal dash represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months where returns were between 1% and 2%). The blue and red horizontal lines represent months during which a presidential election was held. Red corresponds with a resulting win for the Republican Party and blue with a win for the Democratic Party. This graphic illustrates that election month returns were well within the typical range of returns, regardless of which party won the election.

LONG-TERM INVESTING: BULLS & BEARS ≠ DONKEYS & ELEPHANTS

Predictions about presidential elections and the stock market often focus on which party or candidate will be “better for the market” over the long run. Exhibit 2 shows the growth of one dollar invested in the S&P 500 Index over nine decades and 15 presidencies (from Coolidge to Obama). This data does not suggest an obvious pattern of long-term stock market performance based upon which party holds the Oval Office. The key takeaway here is that over the long run, the market has provided substantial returns regardless of who controlled the executive branch.

Exhibit 2.

Exhibit 2.

CONCLUSION

Equity markets can help investors grow their assets, but investing is a long-term endeavor. Trying to make investment decisions based upon the outcome of presidential elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in order to pursue investment returns.

 

[i] Source: Dimensional Fund Advisors LP.

All expressions of opinion are subject to change. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

Diversification does not eliminate the risk of market loss. Investment risks include loss of principal and fluctuating value. There is no guarantee an investing strategy will be successful.

Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services

Flingin' It - Brexit Edition

Photo by   tudor-rose   

Photo by tudor-rose 

Happy Independence Day! Yes, I'm referring to July 4th, the day we 'Mericans celebrate our independence from Britain. But another "Independence Day", at least termed by some, has made for a very exciting week in the markets. Or was it Brexiting?

After seeing the S&P 500® drop over 5% due to the June 23rd vote in the United Kingdom to leave the European Union, I had assumed that today I would be sending one of my Accountable email messages to all of ATX Portfolio Advisors' customers explaining that after four consecutive months of gains, we would be sharing the pain of the Brexit induced June swoon.

Our customers would be looking at their statements, wondering where the year's gains just went and I would be reminding myself that billing only in months where client portfolios increase in value squarely aligns the interests of the customer and advisor. I had teed up a Dimensional Funds article, UK’s EU Referendum Result, which was to reassure readers that this too shall pass.

In an effort to bring some cheer to what appeared to be a London Fog induced dreariness, I was going to share an article by Jim Parker titled, 10 Reasons to be Cheerful. Finally, I also was going to share another Parker column for those of you that prefer to self medicate depression called The Wine Lovers Guide to Investing.

But then the markets did what they so often do, they reacted differently than virtually everyone expected. The S&P 500® rallied to end the month almost where it started, and other markets actually finished higher than before the referendum. If you are an ATX client, you probably will notice that we are billing for the fifth consecutive month (great news for our customers and ATX!).

So, enjoy the material anyway while we celebrate together. Oh, and have a safe and happy Independence Day!