The number one question I am frequently asked is, "How do I think the presidential election will affect the market?" In prior elections, I have always had a preference who won, but my preference did not affect our investment strategy. This election is different. I believe the outcome of the election will affect our management strategies, possibly significantly.
I will apologize in advance to those who do not share my political views. I do not mean to offend you. However, my opinions are based on my experience managing portfolios for the past 26 years rather than pure political ideology. I look at this election from an investment perspective and the potential impact it will have on your portfolio.
Historically, in an election year, the market is usually weak and trending down during August and September. Then, during October it turns up. November and December are usually choppy but have an upward bias. If a Republican or the incumbent wins, the market is usually stronger going into the election. Historically, over the course of the year, the market ends the year about eight percent higher if a Republican wins rather than a Democrat.
From an investment standpoint it would be nice to know how this election is going to play out. That is the trillion dollar question. Most polls show the race very close with Obama having the edge in some swing states. On the other hand, political pundits make the case that the polls aren't accurate, just like they weren't accurate when they showed Carter six points ahead of Reagan just days before Reagan won that election.
This election is very close. It is unlikely to be clear until after the election. It is a tossup on who will control the Senate. We do know that Republicans will continue to control the House of Representatives.
If Obama wins a second term and the Democrats maintain control of the Senate, it is unlikely that we will see a meaningful change in direction. Thus far, their unsustainable path took our national debt from 10 Trillion to a mind boggling 16 Trillion dollars in just four years. President Obama has promoted an agenda of class warfare and demonized the job creators who currently pay most of the taxes. This divisive agenda has scared many investors out of the market. It has created uncertainty for anyone starting a new business or who needs to invest for their future. Obama's policies have significantly slowed the economic recovery and kept unemployment at historically high levels.
Stocks have moved up against a backdrop of a very low GDP and very high unemployment. That is hard to understand until you take into account the effects of three years of artificially held super low interest rates, exceptionally strong corporate profits (fueled by layoffs) and relatively low stock valuations.
Regardless of who wins, it will take a few years for the impact of their decisions to play out. Realistically, if Obama wins then we will not feel the full negative effects of his policies until 2014 or 2015. Likewise, if Romney wins and does what he has campaigned on, then we won't feel the positive effects until 2014 or 2015. So, the markets may just meander along or even drift up until then.
On the other hand, because so many investors invest emotionally and are afraid of Obama's policies, we have to be ready for the possibility that those investors may sell out of the markets because of an Obama victory. Conversely, a Romney victory could have the opposite effect with investors piling into the market and pushing it up, albeit purely for emotional reasons.
In summary, leading up to and after the election there are compelling arguments to be made for staying invested as well as selling out and going to cash. It depends on who wins and how investors react. For us, the investors reaction to the election will be more important than its actual economic impact.