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Pacific Capital Associates

Financial Advisors in San Diego, CA

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July 29, 2016 By PCA

Presidential Elections and the Stock Market

July 29, 2016

Excerpted from a letter sent to clients on July 12, 2016.

Our view on “headline” news events is that while they can certainly have an impact on markets, that impact is impossible to reliably predict, and is often short-lived in any case. Presidential elections seem to fit right into this pattern. 

Presidential party 

Let’s start with what party is in power. Since the turn of the last century, the US stock market has been up during 64% of Republican administrations and 75% of Democratic administrations.1 And while higher for Democrats than Republicans, the average return has been in the high single digits for both parties.2

So knowing which party would win the election wouldn’t have told you too much about when to be in or out of the market — and that’s even assuming that the president’s party has been a big causal factor in stock performance. It most probably hasn’t, as factors such as valuations, Fed policy, and unforeseen economic events seem to have played a much bigger role. Starting valuations are particularly important, and have accounted for a far bigger difference in market performance than which party was in power.3

Election years 

Regardless of who won, presidential election years have tended to be positive for the market. Over the past 50 years, markets were up during 83% of presidential election years.4 The only two that were negative were during the big crashes after the dot-com and housing bubbles (one each for a Republican and Democrat). 

Of course, this year could be different, but it’s worth noting that past elections have given a positive short-term boost to markets no matter who won. 

This election year

Many are convinced that this year’s election will have more impact than usual, largely because of Donald Trump’s candidacy. Here are a few things to put that in perspective: 

  • As of now, polls show that Hillary Clinton is the heavy favorite to win the general election. (Fivethirtyeight.com, an election forecaster highly regarded for its data-driven approach and impressive track record, projects that Trump has less than a 1-in-4 chance of winning). 5
  • If Trump were to beat the odds and make it into the White House, he would still be just one factor of many (arguably more significant to markets) factors, as described above. 
  • As it happens, we don’t have that much exposure to US stocks anyway. This has nothing to do with the election, and everything to do with the fact the overall US stock market remains quite expensive compared to its history. We anticipate mediocre long-term US stock returns regardless of who wins this election, but we don’t think the path to that outcome is predictable. So we’d rather keep our US exposure light, and focused on the less expensive areas of the market. 

Overall, presidential elections make for a lot of news and headlines, but the evidence suggests that it’s better to invest based on valuations than on who’s president. Our low exposure to US stocks is based on valuations, not on the election.



1 Source: Business Insider
2 Source: CNN
3 The graph “Starting Valuations and Subsequent Returns” in this article shows that the difference in returns for expensive markets versus inexpensive markets has been far greater than the difference between Democratic and Republican presidential administrations. 
4 Source: Investech Research 
5 Source: FiveThirtyEight.com

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