16 Jul Election Noise 101: Ignore Market Predictions

Every investor – or rather – smart investors know they should ignore any and all market predictions. They are rarely correct and often lead us to poor decision making. Why is it, then, that we are so easily sucked in to believing these ideas during an election year? Here are some predictions I’ve heard recently:

“Republicans are good for markets, and Democrats are bad for them.”

“This candidate will lower our taxes, that is better for the economy, therefore if they win the markets will increase.”

“That candidate will increase social program funding, and this will lead to inflation.”

It’s as if we all forget rationality and suddenly these things are true. I’m here to remind you: they are not. Election outcomes historically have had little to no meaningful impact on your results as a long-term investor. Research by Fidelity shows that the S&P 500 has produced very similar returns under Democratic and Republican presidents, no matter which party controlled Congress.

But wait, there’s more. Looking at the chart below, the S&P 500 has achieved an average compound annual growth rate of 9.8% under Democratic presidents and 6% under Republican presidents since 1957. Before my Democrats get too excited, the S&P 500 has achieved a median compound annual growth rate of 8.9% under Democratic presidents and 10.2% under Republican presidents since 1957. If you change up the timeframe we report on, the way you calculate returns (i.e. including dividends or not), or who controlled congress, the results change. This is really important, because predictors will often point to data to convince you something is true. If you change one piece of that data, your outcomes change as well.

Even individual sectors don’t seem to care much whether the White House goes blue or red: In presidential election years since 1976, every single sector has outperformed in years Republicans won and in years Democrats won. Every sector has underperformed amid both parties’ victories too. So, the next time you read that one candidate is good or bad for energy or technology or health care or financials, it’s worth being skeptical. 

The S&P 500 returned 1,920% over the last 30 years, compounding at 10.5% annually, and investors can expect similar results in the long run regardless of who sits in the Oval Office. While I’m sure we have a long road of policy-arguing and mudslinging ahead, one thing you can remove from the argument is market returns. It simply does not matter who is president. Please give us a call if you wish to discuss this, or any other financial topic!

This quote, attributed to Yogi Berra, captures the essence of the problem with predictions: “Prediction is very difficult, especially about the future.”