What Will The Stock Market Do Now?

What Will The Stock Market Do Now?

Now that the presidential election is behind us, many Clinton supporters have threatened to pull all their money out of the U.S. stock market and leave the country.  Should we sell all our stocks now before the mass exodus starts?

This analysis of course comes under the category of predicting the future, and my readers know very well how I feel about that topic.  Nonetheless, you are going to hear a lot about this in the media, so just for fun let’s emulate those technical analysts who make a living by looking at historical patterns to see what actions to take.  The academics at Dimensional Fund Advisors have reached back into history to compare the performance of the S&P 500 the year of a presidential election with its performance the following year.  Going back to 1928, here’s the list of those presidents under whom the market performed better the year after the election vs. those under whom the market did worse:

Better Worse
  Hoover (Rep) 1928
Roosevelt (Dem) 1932  
  Roosevelt (Dem) 1936
  Roosevelt (Dem) 1940
Roosevelt (Dem) 1944  
Truman (Dem) 1948  
  Eisenhower (Rep) 1952
  Eisenhower (Rep) 1956
Kennedy (Dem) 1960  
  Johnson (Dem) 1964
  Nixon (Rep) 1968
  Nixon (Rep) 1972
  Carter (Dem) 1976
  Reagan (Rep) 1980
Reagan (Rep) 1984  
Bush (Rep) 1988  
Clinton (Dem) 1992  
Clinton (Dem) 1996  
  Bush (Rep) 2000
  Bush (Rep) 2004
Obama (Dem) 2008  
Obama (Dem) 2012  

What can we glean from this data?

  • Across the last 22 elections, the S&P 500 performed better the following year 10 times and performed worse 12 times.
  • 80% of the time the S&P 500 performed better the following year when a Democrat was elected.  64% of the time returns were worse when a Republican was elected.
  • Whenever a president was elected for the first time the S&P 500 performed better the following year 6 times and performed worse 7 times.
  • Whenever the president came from a different party than his predecessor, the S&P 500 performed better the following year 4 times and performed worse 5 times. All four times the subsequent year was better occurred under Democratic presidents.

What expectations about the market’s performance in 2017 should we take from this?  Much of the data is inconclusive except for two interesting factoids: whenever a Republican president has been elected, the market’s performance the following year has more often been worse.  More significantly, the market has never performed better the year subsequent to an election when a Republican president replaced a Democratic president.

Given all that, what should we do now?  I am reminded of the world of sports, where the media proclaimed loudly during the San Jose Sharks/Los Angeles Kings playoff series how rare it would be for a team that lost the first three games (the Kings) to come back and win the next four in a row (and subsequently win the series).  Yet it happened.  So much for that data point.  This is the problem with trying to use historical data to accurately predict the future.  And from the data above it is difficult to identify any systematic return patterns in elections years.  Even if we could, how would we know whether or not market expectations associated with the election outcome aren’t already embedded in stock prices?

Despite the extreme divisiveness of this latest election, my advice would be to stick to your current investment strategy, which should be based on your future lifestyle goals, not on who is elected president.  And continue to make sure that your investment portfolio is well-diversified across many different asset classes.  I am not aware of any data suggesting that any one asset class should outperform any other under the new administration.  Not even Canadian real estate!

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