2016 Presidential election in U.S. not an indicator of future

ARTICLE CATEGORIES


ARCHIVES


Hopefully Canadian investors have not made investment decisions based on the recent American presidential election.

What we have learned over the last 90 years is making any prediction based on a presidential election is a waste of time.
What we have learned over the last 90 years is making any prediction based on a presidential election is a waste of time.

This article was written last weekend, prior to Tuesday’s (Nov. 8) election. My personal opinions given in this column are not a result of this week’s election, but based on previous U.S. presidential elections over past decades.

Financial advisors and investors are often looking for a crystal ball that can be used to anticipate the future value of stocks. The dream is to successfully use this information to make investment decisions that will result in large capital gains.

That’s the “greed” part of investing. Investors often want to strike gold. Historically, making predictions based on speculation has not proved to be a successful investment strategy.

That reality, however, never seems to stop the endless supply of opinions by so-called experts who attempt to see into the future. Predictions should be considered as noise that attempts to drown out evidence-based investing: an approach based on sound principles and executed in a disciplined manner over a long period.

If predicting the future of stock markets could be based on presidential election results, then that information would be widely known, and investors would use it to their advantage.

Yes, it is true that surprise outcomes can greatly affect the future value of stocks. The problem is that predicting surprises on a consistent basis is not possible.

Sometimes when a person makes a successful prediction they get the false sense of security that they have the ability to predict the future. In reality, a correct prediction is nothing more than good luck, not good skill.

Standard & Poor’s 500 (S&P 500) is an index of 500 U.S. stocks, representative of the U.S. stock market. I looked at their monthly returns from January 1926 until June 2016. That time period covers nine decades and 15 presidencies, from former presidents Calvin Coolidge to Barack Obama.

There is nothing in the data that suggests any sort of the long-term pattern of investment performance being related to which party holds power. The long-term results of the U.S. stock market have been strong regardless of which party holds the Oval Office.

When the monthly results of the U.S. stock market are shown in a graph, it is visually obvious that the normal volatility of the ups and downs of the stock market are consistent during all the different presidencies, and the relative increase in value of the stock market is generally consistent over time.

In summary, what we have learned over the last 90 years is that making any prediction based on a presidential election is a complete waste of time.

My assertion supporting evidence-based investing, as opposed to speculating and guessing, has been provided in other columns in previous years. This U.S. election has captured the imagination of many of us and as a result many wonder if this time is different, and there can be some reason to consider the election results as a way of predicting the future.

This time is no different. Invest based on evidence, ignore speculation, and that will be your formula for success.

Celebrating 25 years in business