Politics and investing


Posted by: Nicola Macdonald, on June 2, 2016.


“It promises to be a nervous week for global markets as traders mull over the relative performances of the US presidential candidates. With no clear favourite, the US stock market is unlikely to find any clear direction until the winner is named.”

Does that sound familiar?

That line from an article by the Reuters news agency was carried in newspapers around the world. Last week? Last month? No. In fact, that article is from September, 1988 and was about the Bush-Dukakis debates of that year.¹

As in the 2016 campaign, that election pitted two nonincumbents against each other as President Reagan completed his requisite two terms. As 1988 began, the New York Times/CBS News Poll talked of a political mood of “drift and uncertainty”.²

This isn’t to imply that every campaign is the same, but it does serve as a reminder that markets regularly navigate political uncertainty. As for supposed “patterns” in election years, research shows 12-month results are strikingly similar to overall averages.³

¹Wall St has Jitterbug over Presidential Election, The Independent, 26 September 1988
²Regan Influence Wanes, Poll Finds, NY Times, 26 January 1988
³Presidential Elections and Market Returns, David G.Booth, Dimensional, September 2004

Of course, the US is not the only country holding national elections or referendums this year. So is Australia, where, again, two party leaders with no experience of leading a campaign are vying for a lower house majority in a race which pollsters say is too close to call.

Prime Minister Malcolm Turnbull, leading the Liberal- National Coalition, and Bill Shorten, leading the opposition Labor Party, are standing on diametrically opposed platforms—the former promising corporate tax cuts and the latter more spending on health and education.

In the Philippines, a new president and self-declared “strongman”, Rodrigo Duterte, has come to power advocating extra-judicial killings to stamp out crime and drugs.

And in the United Kingdom, voters are due on June 23 to cast a ballot in a referendum on whether Britain stays in the 28-member European Union. The UK conservative government has warned voters of a possible recession should they opt for a “Brexit”.

What do all these events mean for equity markets, for government bonds, for commodities and for currencies? Those kinds of questions get a real workout at these times in the financial media, which inevitably finds a wide divergence of opinion from market observers.

While many people will have a keen interest in political outcomes, academic studies show little pattern in actual market returns during US presidential election years.

Figure 1 shows the performance of the S&P 500 in 22 US election years dating back to 1928.

Politics and investing

You can see in four of those years, the market fell. In the other 18 instances, it rose. But the truth is this sample size is too small to make any definitive conclusions. And, in any case, it is extremely hard to extract the political from other influences on markets.

For example, the worst annual market outcome during a US presidential year in this sample was 2008 when Democrat contender Barrack Obama defeated Republican nominee John McCain. But if you recall that was also the year of the collapse of Lehman Brothers and the global financial crisis.

Another down year for the market was 2000, the year Republican George W Bush defeated Democrat Al Gore in a tight contest. But that was also the year of the collapse of the bull market in technology stocks, the so-called “tech wreck”.

The point is that any one time markets are being influenced by a myriad of signals and events— economic indicators, earnings news, technological change, trends in consumption and investment, regulatory and policy developments and geopolitical news, to name a few.

So even if you knew ahead of time the outcome of an election in one country, how would you know that events elsewhere would not take greater prominence for the markets?

Keep in mind, also, that elections have a limited range of possible outcomes—a clear win for candidate or party ‘A’ or ‘B’, or an inconclusive result. Markets will adjust ahead of time to deal with risks around these outcomes. And the degree to which they move on the result will often depend on how much it varies from the consensus expectation.

So while we have responsibilities as citizens to take an interest in elections, it is by no means clear that these events have long-term implications for our decisions as investors.

That is much more a matter of our own goals and risk appetites, our investment horizons, the structure of our portfolios, our degree of diversification and the costs we pay.

 

 

 

 

 

 

 



|

Enter your email

Get free investment, pensions and wealth management news and advice.

* indicates required

*We will never share your details with any third party.


Categories



Client Stories





Book a consultation


Your Name (required)

Email (required)

Phone Number

Age

Employment Status

Income

What you would like to talk about?

captcha

Enter exactly what you see above






Enter your email to receive free relevant news and updates.

* indicates required

*We will never share your details with any third party.


Latest… View all




Putting the current stock market decline in context


There’s no doubt hyperbolic headlines depicting the recent falls on the world’s financial markets are potentially anxiety-inducing. With the FTSE 100 Index falling to its lowest level since April 2017, the effect of the headlines is to promote a sense of uneasiness; we’re here to remind you that this shouldn’t be the case. Instead of […]

Read more →


Inheritance Tax is an avoidable tax


It is often said that Inheritance Tax is an avoidable tax, but many of us somehow fail to avoid it. Why is this? In our experience, clients’ failure to plan effectively is a result of the following perceived problems: Speed – How often will the thought of having to survive 7 years from the date […]

Read more →


What went wrong with the forecasts?


Reading the tea leaves Investors at year-end are inclined to reflect on the 12 months gone and muse on what the coming year might bring. Aware of this appetite for speculation, themedia tends to feed it with forecasts. These articles can be fun to read, but are even more so a year later. In January […]

Read more →


What should investors make of bitcoin mania?


Bitcoin and other cryptocurrencies are receiving intense media coverage, prompting many investors to wonder whether these new types of electronic money deserve a place in their portfolios. Cryptocurrencies such as bitcoin emerged only in the past decade. Unlike traditional money, no paper notes or metal coins are involved. No central bank issues the currency, and […]

Read more →