The world keeps turning

The world keeps turning

Last week the American people overwhelmingly voted to reelect Donald Trump as their president. With the house and senate also going red, the Republicans have at least two years to pass whatever legislation that they want.

Four years ago I asked how much influence the US president has on the markets. Cutting regulation in energy and finance didn't help these sectors outperform the S&P 500. It is important to remember what the market is. It is a powerful information-processing machine. The combined impact of millions of investors placing billions of dollars’ worth of trades each day results in market prices that incorporate the collective expectations of those investors. This makes consistently outguessing market prices very difficult.

Stock market data going back almost 100 years shows that returns in months when presidential elections took place are no different to the returns in any other month. The chart below shows the frequency of monthly returns (expressed in 1% increments) for a broad-market index of US stocks from January 1926 to December 2023. Each horizontal dash represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months in which returns were between 1% and 2%). The blue and red horizontal lines represent months during which a presidential election was held. This graphic illustrates that election month returns have been well dispersed throughout the range of outcomes, with no clear pattern based on which party won the presidency.

Source: Dimensional Fund Advisors

Shareholders are investing in companies, not a political party. And companies focus on serving their customers and helping their businesses grow, regardless of who is in the White House. Stocks have rewarded disciplined investors over the long term, through Democratic and Republican presidencies. Making investment decisions based on the outcome of elections, or how investors think they might unfold, is unlikely to result in reliable excess returns. In fact, it may lead to costly mistakes. It is important to stick to your long term plan regardless of who is in the White House


Steven Barrett

11 November 2024

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