Politics And Your Portfolio: Is There A Relationship?

Virtus Wealth financial advisors > Politics And Your Portfolio: Is There A Relationship?

by | May 5, 2016

As citizens of the state of Texas we all have strong opinions on who our next President should be; however, in this article we are only focused on the impact the election may have on your portfolio. There are several theories about which outcomes have favorable or negative impacts on the market. For example, some believe that having one party rather than the other leads to better market performance, while others believe that having gridlock in Washington is the key market success after an election.

If you dig around in historical returns of the S&P 500 you can see arguments that markets perform best during Democratic Presidential terms or that having a Republican Congress breeds optimal market results. There is so much data and so many different economic scenarios that support for nearly any election theory can be found if you try. The fact of the matter is that the relationship between market performance and election outcomes is extraordinarily weak, ask shown in this graphic from Goldman Sachs Asset Management and Bloomberg:

Source: Bloomberg and GSAM.

Bottom Section Notes: Analysis from December 31, 1946 to December 31, 2015. Strength of relationship is determined by R-Squared, a statistical measurement of how close a set of data fits a regression model (best-fitting line).

As you can see above, a strong relationship would be on the level of 0.7 or higher. None of the relationships between each combination of President and Congress even reach a strength of relationship of .1. This tells us that it is best for investors to separate their political views from their portfolio.

Although election results may not be a good indicator of stock market performance, the opposite relationship may hold some water. If the stock market is up in the three months leading up to the election the statistics point to the incumbent party winning but if the stock market is down in the preceding 3 months of an election predict a new party will take office. Stock market results in the 3 months leading up to a Presidential election have correctly predicted the winning party 86.4% of the time in the 22 elections since 1928 (according to an article on Kiplinger.com titled “How Presidential Elections Affect the Stock Market”).

So ask not what your President can do for your stock market, ask what your stock market can do for your President.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized advice.

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