Elect to Leave Your Portfolio Alone
By Weston Wellington, Vice President. Nov 4th, 2022
On November 8, US voters will cast their ballots for all 435 seats in the House of Representatives and 35 seats in the Senate. Many investors are concerned with the effect of election results. Do past results suggest a useful strategy to deal with election-year uncertainty?
The answer is yes.
For the 96-year period ending in 2021, the S&P 500 Index (with dividends reinvested) posted an average return of 12.33% for all calendar years and results were negative in roughly one out of four. During that time there were 24 midterm congressional elections. The average return for the 12-month period following the election was significantly higher at 19.58%, with only one negative result.
Do these numbers suggest investors should load up on stocks just prior to every midterm election? Not so fast. Investors should not make too much of these results—stock returns vary so much from one year to the next that a statistics professor would likely frown on drawing conclusions from only 24 observations. But if investors are looking for reasons to fret over election returns, there is little evidence that changes in political leadership are useful in making portfolio decisions.
These results should come as no surprise. Voters express their opinion at the midterm ballot box once every four years. Consumers express their opinion at the cash register every day by deciding which products and services to buy. Many of us have firmly held opinions regarding politics and policy, but we don’t invest in 535 men and women gathering in Washington D.C.
We invest in companies located in Moline, Illinois (Deere & Co.), Los Gatos, California (Netflix), and Bentonville, Arkansas (Walmart). Government policies may have an effect—either positive or negative—on some firms, but the men and women running these firms face challenges and opportunities from dozens of factors. Jim Farley has to juggle resources at Ford Motor to maintain the F-150 pickup truck as the best-selling vehicle in the country while investing in new technology to power models with electric motors. Bob Chapek has to decide how much of Disney shareholders’ money should be spent on new cruise ships and how much on movies. Vicki Hollub of Occidental Petroleum must determine if it’s best to use healthy cash flow this year to pay down its substantial debt or ramp up exploration efforts.
Are these CEOs concerned with election results? Quite possibly. But we suspect they are far more concerned with a host of issues they face while directing organizations with operations and employees in multiple countries around the world. The same goes for the thousands of other companies, large and small, across the US that are looking for ways to maximize profits for shareholders.
Bottom line:
Predicting election outcomes is difficult, and predicting how securities markets will react to those outcomes is harder still.
Source: Dimensional Fund Advisors
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