Note from Our CIO: The Presidential Election of 2016

Many investors are worried that November’s outcome could lead to a crash in the economy and the stock market. Our concerns or emotions can be our guardian if used in the service of reason and long-term, evidence-based planning; however, emotions can be our destroyer if they lead to shortsighted choices based on alarmism and biased information. We will return to the role emotions have with money, but let’s first follow the data, wherever it leads us, and see what conclusions we can draw.

In 2004, the CEO of Dimensional Fund Advisors (DFA), David Booth, analyzed the prior 19 elections going back to 1927 and found that the returns of the U.S. companies for the 12 months after the 19 elections were on average “strikingly similar” to the average of all 12-month returns going back to 1927. In the article discussing this result, “Presidential Elections and Market Returns”, Mr. Booth found this to be true for the overall market of publicly traded U.S. companies, as well as for the “sectors” of the market such as the smaller companies or the cheaper (“value”) companies; he even found it to be the case for government and corporate bond returns.

In 2012, DFA conducted a similar analysis (“The Behavior of Market Premiums at Different Stages of the Business Cycle”) going back to 1945 and found that there is no (statistical) difference between the returns of the U.S. stock market at different parts of the business cycle, namely, recessions and expansions. This is relevant if one believes a Presidential election could trigger a recession.

Within days of this writing, DFA published a new study, “Presidential Elections and the Stock Market”, which provides the following illuminating exhibit of the growth of one dollar over nine decades (since 1926) and 15 presidencies (from Coolidge to Obama).

The striking take-away from the exhibit is the remarkable consistency with which the stock market grew over the presidencies, regardless of party.

But maybe this time is different? Every crisis or temptation to exit the stock market will always seem different. In fact, they will always be different in detail, but as history has shown, they are never different in terms of what the rational response should be as investors. Market prices at all times reflect the aggregate expectations of all market participants and the market incorporates the totality of all publicly available information about the past, present and future state of the world and economy very quickly, “which makes timing decisions nearly, if not completely, impossible” (DFA, 2012).

To change one’s allocation (or exit the market) with the hope of improving returns, or even protecting money, based on a view of the outcome of the election is to say that one knows something that the collective wisdom of many trillions of dollars invested in the stock market does not know…and that one will know it again at the future time when attempting to re-enter the market. Both are unlikely scenarios alone and highly improbable in combination. At best, this would be acting against reason. What would be likely in such a market-timing scenario would be high transaction costs and missed growth that can never be made up.

The equity markets represent the world’s most important asset: human ingenuity. No matter the result of the 2016 Presidential election, the outcome is very unlikely to have any meaningful impact on this most important of assets, human ingenuity, over the long-term. We invest in companies – not countries, or Presidents – whose mission is to produce more value than they consume, or else they will perish. I feel comforted – and here is an example of emotions serving one’s best interest – knowing that the long-term focused, rational decision makers of these companies are already setting plans in motion to navigate around the outcome of the upcoming election, as well as any number of world events that affect their business that I am not even aware of.

Occasionally, the greatest obstacle in the success of our long-term financial and investment plans can be – not our investments, nor the market, but rather – ourselves. At these critical times, and always, your Abacus advisor would welcome the chance to sit down with you and talk this over.

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This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell this security. This newsletter contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Information was based on sources we deem to be reliable, but we make no representations as to its accuracy. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Information related to the firm’s performance is based on pure model portfolios only and is net of fees. Certain clients may have holdings that deviate from the model and as such individual client performance may be different than the results presented herein.

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