Elections and Financial Markets

October 7, 2016
Jeff Brown, MD

“There are lies, damned lies and then there are statistics.” In recent election years, instead of analog tea leaves, financial analysts have turned to deep-diving and number-crunching to not just predict who would win, but also what effect the presidential election might have on our money.

Mark Twain (or Benjamin Disraeli) once famously said “There are lies, damned lies and then there are statistics.” In recent election years, instead of analog tea leaves, financial analysts have turned to deep-diving and number-crunching to not just predict who would win, but more importantly, for them, what effect the presidential election might have on our money.

One myth that analysis has refuted is that the markets do better with a Republican in office than they do with a Democrat. In fact, going back to WWII, or to 1900 even, the market has gained an average of 9% annually under Democrats while 6% is the number for Republicans.

FYI, the stock market has risen 11.8% annually under President Obama. Only Coolidge (25.5%, pre-crash) and Clinton (15.9%) have done better.

Another myth is that all gridlock hurts financial markets. Au contraire mon ami, split US governments have yielded consistently higher returns than when one party controlled both elected arms. Historically, the worst returns have been with a Republican President and a GOP controlled Congress. In the 12 years that this occurred in the last century, returns averaged a paltry 2.1% per year.

Gridlock tends to produce stability and that’s what gives economic markets comfort. Gridlock may not be good for dealing with the nation’s problems overall, but it is good for the financial markets generally.

A third myth is that election years are especially strong for stocks. It is true that in election years markets are up, an average of 10.7%, according to Merrill Lynch. But pre-election years average a 16.5% gain; so much for that theory.

To be fair, numbers can be manipulated and/or cherry picked. We need to keep in mind that statistics are not destiny. And polling statistics could be another example of the tail wagging the dog in money affairs.

The Gallup Poll, arguably the gold standard, has abandoned election polling as too unreliable. Polls can be far off of the mark, such as the recent Brexit vote showed, to much surprise, and again showed that polls have the potential to do more harm than good when they lead to complacency.

That’s partially true because the media, in its desperate 24-hour news cycle search for content, trumpets the result of every poll, valid or not. Which, in turn, provokes an avalanche of reaction from the numerous talking head pundits that riddle our TV screens. They would have us believe that such results are always true, important or matter. And then the markets overreact, thankfully, and usually, just temporarily.

Let’s keep in mind that whoever wins in November, most economic power in Washington is wielded by Janet Yellen and the Federal Reserve Board, not the elected officials that come and go. Bureaucracy has that wonderful staying power, don’t you know.

Remember too, that candidates may promise a chicken in every pot, but all of us, and them, though they will not publicly admit it, know that getting campaign assurances accomplished once elected, let alone paid for, is highly problematic.

The financial markets know all of this and usually take it in stride because the economy is so large and so strong that one temporary politician may only have a restricted impact on long-term economic growth. A good example of this is the protectionist policies being touted this year. All financial people know that such populist notions are bad for business and will be both actively and passively opposed.

So what is the takeaway from all of this? Only that it is hard to predict politics and even harder to predict market responses, if any, especially long-term. So no matter what happens in November, it is wisest to stick to your established financial plan. “Stay the course….” And as my father-in-law used to say, “This, too, shall pass.”