If X candidate wins, should I get out of the market?
This is a question that gets posed by many people of various political stripes as Election Day 2012 draws near. For some the question has been anticipatory, and they wonder if they should “hide in cash” already. Speculating and moving your long-term investments based on the outcome of November 6th is not the best thing to do. Allow me to note a few reasons why.
The Big Issues
Whether the next president is a Republican or a Democrat, he will have to deal with mounting federal deficits that are unhealthy, a federal debt level that is unsafe, devising a tax policy that promotes growth and finances the government, and having energy and infrastructure strategies that are sensible and coherent. All of these issues take a growing economy to handle, not a flat or negative one.
A President’s Influence
Economic cycles are long term in nature and move based on deep rooted factors such as trade and demographics. They also are influenced within a country by monetary policy, fiscal policy, and other factors. The president has a role in influencing, not moving it. We have a market-based economy, not a command economy; and though there have been laws put in place over the last several decades to extend the president’s influence, increased globalization and world competition lessens it too.
Stock Market Reaction
The average market gain of the S&P 500 index during election years from 1904 through 2008 is 7.5%. There is variance depending on which party is in the White House, controls the Senate, or runs the House. As you know, in this election year the S&P 500 index is also up. To me, more importantly, is what happens the year after, either the 1st year of a new presidency or the 5th year of a current one. Again, the combination of who controls the House and Senate plays a part.
The problem with taking action on this historic data is that you are not investing for any one year. You are investing for multi-year and multi-decade periods of time. Those moving money based on a single outcome or a single year are speculating. Speculation is not a game we play with your money. If you pull your money out, you may miss continued growth. Then just before a pullback, you may jump in again and get harmed. Or you pull out, the market does retreat, you don’t get back in when prices decrease, and you are stuck on the sidelines with long-term monies not growing at all. No one jumps in and out successfully over time.
So we get back to the biggest reason people succeed or fail financially. Not the market, not the economy, not an election…but their behaviors. Our brains, when allowed to be in reaction mode only, use short-term stimuli for long-term decisions.
What to Do
I do not know which way the election will go. I do not know whether the US Stock Market will be positive or negative in 2013. This is about cycles, as I noted in the beginning, not about a presidential term. So is a cool off possible regardless of who wins? Of course. But we don’t know if it is certain, we don’t know the extent, and basic investing lessons tell us to be ready to invest more at that time, not less. If you use effective money managers, they are preparing for these various scenarios.
Also, if you are invested well, you do not have all of your money invested in the S&P 500 index. You have bonds (government and corporate, short and long); you have stocks (U.S. and foreign, large, medium, and small); and you likely have other equities that do not move in lock step with the stock market.
As a U.S. citizen, you should pay attention to policies, debates, and platforms of candidates. (Avoid commercials!) But as an investor, you should distance yourself from the election year buzz. Over the long-term, company earnings, economic fundamentals, and competitiveness, along with your common sense and sensible diversification, matter more than an election.