As the presidential election approaches, more and more articles are appearing with titles such as “Here’s How to Hedge Your Portfolio against a Trump Victory” and “How to Invest if Hillary Clinton Wins the Election.” Yet even in light of the unprecedented polarization surrounding this election cycle, prudent long-term investors should pay these theories no mind. Any sound long-term investment strategy is based on the investor’s specific goals and risk tolerance and picks securities corresponding to these long-term objectives. Repositioning these holdings in an attempt to time the short-term volatility of an event is essentially taking your eye off the ball and can be a pretty big gamble against your nest egg.
To support this, there is a good amount of data that debunks the correlation between presidential politics and stock market returns. A 2004 econometric analysis by Sean Campbell and Canlin Li of the Federal Reserve, perhaps the most comprehensive review of the subject to this day, titled Alternative Estimates of the Presidential Premium concluded that “these results are consistent with the notion that neither risk nor return is significantly different across the presidential cycle.” Four years later, a Vanguard study reaffirmed this conclusion, finding that the variation between market returns under Democratic and Republican administrations since 1852 was negligible.
The bottom line is that, no matter who emerges victorious on November 9th, the underlying fundamentals that determine the long-term value of the stock market and the companies within it will not change. As Warren Buffet’s mentor Benjamin Graham fittingly once said, “In the short-run, the market is a voting machine but in the long-run it is a weighing machine.”