Now that the race for the democratic nomination appears to be over, I’d like to think, as a nation, everyone will take the time to step back and give some deep thought as to how they will vote.
Personal preferences aside, what will be best for our country?
Reality, however, creeps in to my utopian view as the phone rings, and someone earnestly asks me, “How will this election affect my investments?” I guess personal preferences are not so easily set aside.
It’s a common question. And plenty of research has been done in an attempt to determine the answer.
The facts:**
- Election Years
Typically the stock market performs best during election years. Statistics going back to 1803 tell us the market performs better during the second half of a presidential term than the first half, with the fourth year – election year – having the highest returns. The year isn’t over yet, but so far 2008 isn’t following this pattern. Perhaps 2009 won’t either.
- Democratic Administrations
Both large and small cap stocks have performed significantly better under democratic administrations. Inflation, however, has been higher during these terms.
- Republican Administrations
Bonds and treasury bills have performed better under republican administrations. Inflation has been lower during these terms.
- Gridlock Administrations
Large cap stocks, bonds and treasury bills have performed better under times of political gridlock. Inflation has been higher during these terms. Small cap stocks have performed better under non gridlock terms. Inflation has been lower.
- Monetary Policy
The single biggest factor that seems to point toward higher returns is monetary policy. Under expansionary monetary policy, stocks and bonds have fared significantly better, and inflation has been lower.
Where do all those facts lead us? Right back to where we started, wondering how the election will affect us.
The data makes for interesting coffee or cocktail conversations, but that’s about it.
Investment decisions should be based on your long term goals, the rate of return you need to earn to achieve those goals, and your comfort level with fluctuation in your account values (risk).
**Source: Wells Fargo, Quick Market Update, Oct. 18, 2007, by Dean A. Junkans, CA, Chief Investment Officer, and James P. Estes, PhD, CFO, Senior Investment Manager.**Their sources: Ibbotson Associates Data from 1926 to 2004; Review of Financial Economics (Jan. 12, 2003): Is Presidential Cycle in Security Returns Merely a Reflection of Business Conditions, by Booth and Booth; Journal of Portfolio Management (Summer 2004): Don’t Worry About the Election, by Beyer, Jensen and Johnson; Political Influences on the Dow Jones Industrial Average Index Returns: Perception and Reality by Estes and Chen, article not yet submitted.
Call me crazy, but my sense is that there is an uplift in most people’s feeling about the economy. We have been in a recession for some time and there must be an end to it at some point…one hopes. Personally, I am being crushed by college debt and facing the option of bankruptcy. I am in the top five percent of wage earners and work two jobs…as does my partner. We are well educated with advanced degrees and live comfortably…probably too comfortably. We don’t splurge much, drive old cars and still cannot make ends meet. There just aren’t enough hours in the week to make it work. Credit cards have ruined our lives. Call me stupid…I gave my kids every opportunity for success. They are great kids, but the cost is high.