“ObamaCare (or any other piece of legislation) may make you giddy or may make you want to shake your first at the sky. But leave all that out of your investing decisions because it doesn’t much matter. I know that’s hard for you to believe. Maybe even impossible. That’s your problem.” - from “Markets Never Forget”
Are you able to separate your political bias from your market analysis? If you’re being honest, you’ll find it extremely difficult. Example:
“Party X/Candidate Y got elected, and he’s an awful human being who likes to club baby seals! Short everything! It’s all going to zero!!!”
If this is you, read on.
Part of making a good call when investing is understanding what the general expectations are, and how you think reality will be different. If a certain political party X is in charge, expectations may be that the stock market will be lousy; if political party Y is in charge, expectations may be that the stock market will boom (I’ll leave it to you to fill in the letters with your party of choice).
Thing is, expectations always run into messy reality. The new administration’s policies aren’t as bad (or as good) as we’re led to believe, and realignment becomes possible. It’s the reason stocks have historically tended to perform better in the 3rd and 4th years of a presidency than in the 1st and second, because most political action is taken during those first 2 years before the focus turns to getting reelected.
Not to say elections don’t have consequences, but so many of us allow the ideological blinders to impact decisions to invest or not to invest. In fact, historical data throws expectations on their ears: if you remove the Great Depression (a statistical outlier), stock market returns under Republican and Democratic presidents are not far apart; in fact, Democrats have a slight edge.
And if that isn’t enough to make you pause, perhaps this will: in years where we have historically re-elected a Democrat, the S&P500 has averaged 14.5% returns.
In that light, you need to ask yourself 3 questions: What do people EXPECT to happen? What will ACTUALLY happen? And, how do you exploit the disconnect?
[For more analysis on ideology-free investing and other radical concepts, check Ken Fisher’s book, “Markets Never Forget”: http://www.wallstreetoasis.com/blog/markets-never-forget-but-people-do-…]
There will be considerable turmoil and volatility in the market up until the fiscal cliff. If you look at a 2y chart of the Dow, it looks like it should turn around here, but it won't.
Good points. In my experience, a few years of living abroad from your home country allows you to dampen (not lose) political bias. Viewing things from the outside is always eye-opening, helps being objective in regards to markets. My 2 pennies...
Pre-election equity market was priced such that sequestration / fiscal cliff problems are nonexistent. Since then it has declined ~5% and dropping. FMPs are sheep. Or computer programs made by programmers that don't know what EBITDA is.
I think you can say the same about FDR and even Obama. Yeah the economy grew quickly under them...but only because it was recovering from crises.
In my opinion, the best we could hope for as market participants is a president that does nothing. Having to account for potential regulation, stimulus, QE, etc. makes investing far more difficult.
election outcome generally doesn't have as big an impact on markets people think. Rather their is a cycle that follows the election cycle regardless of who wins. I'm actually doing an in depth research project on this.
With all this uncertainty, bond yields are plummeting. 30 year mortgage rates are getting close to 3.25%. Refinancing activity should pick up.
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