Don't Try to Time Elections
Resist the urge to let predictions affect your portfolio.
Ian Tam: With the U.S. presidential election fast approaching, you as an investor might be tempted to tactically adjust your portfolio in anticipation of what might happen in the wake of a Biden or a Trump administration. But does it actually make sense to do this? Let's have a look at what the data says.
This chart shows what would happen if you had invested $100,000 U.S. dollars into the S&P 500 Total Return Index on Oct. 31 in each presidential election year since 1972. Each line represents a different presidential term with the president highlighted on the right. You can see that over the medium term, or about 48 months, the results vary dramatically.
Now, for those analysts among us, your initial inclination might be to try to tie the performance of the index to the political party that's in power. Let's have a look again with this in mind.
The second chart is the same as the first, but this time showing the political affiliation of each president. A Democratic president is outlined in blue, and a Republican president is outlined in red. Again, the results are heavily mixed.
So, what do we make of this dog's breakfast? Well, really nothing. In a recent column, my colleague and Morningstar veteran John Rekenthaler commented on the idea that presidential elections don't really affect the economy or stock prices as much as we think they do.
John looked at the real GDP growth rate from January 2014 to December 2020 in the U.S., the last three years of President Obama's term and the first three years of President Trump's term. Although the two presidents had radically different policies, the growth rates were similar at 2.4% annualized during the last three years of Obama's term, and 2.3% annualized during the first three years of Trump's term.
Remember that economic conditions don't always reflect stock prices. The most glaring example of this is actually happening right now. Despite bleak economic conditions, the S&P 500 continues to be resilient, showcasing the disconnect between the economy and stock prices. So, what can you as an investor do? The simple answer is nothing. Sticking close to your risk tolerance and maintaining discipline in your portfolio will likely afford you better results in the long run over guessing who the next president is going to be in the U.S.
For Morningstar, I'm Ian Tam.