The Presidential race is heating up and both sides are preparing for battle. Republicans and Democrats alike will tell you that if they don't win, the country will be in for a horrific four year stretch. The county's populace seems to be just as divided with politics as polarizing as ever. While conventions, stump speeches, and political scandals may be great for the news media, a recent study has come out confirming our long-held view: politics have no place in portfolios. Researchers studied the returns of hedge fund managers that supported Republican candidates after Obama was elected. The results weren't pretty:
Upon closer inspection using monthly regressions, we find that the Democratic managers outperformed the Republican managers from December 2008 to September 2009 by approximately 7 percentage points annualized return, which conversely is a high price paid by Republican managers and their clients to maintain a consistency of beliefs.
You may think if a certain candidate gets elected this country is going down the tubes. Hopefully, you continue reading this article, step back from the brink, and don't make any changes to your portfolio. None of this is meant to say that Republicans or Democrats are better for the economy (or as managers). What we are saying is that who is in office has very little impact on stock market returns. Studies have found this to be case, but investors still seem to entangle their political beliefs with their portfolio. One of the reasons given in the paper for the underperformance of the Republican hedge fund managers was the idea of cognitive dissonance. The Cognitive Dissonance Theory states that individuals tend to seek consistency among their beliefs and opinions (ask yourself what type of news you watch or articles your read). When inconsistencies between facts and attitudes don't match, our unconscious works to either change our beliefs or silence the facts.
When it comes to investing, it is best to ignore politics. In almost all cases, they have very little impact on financial markets.
Republicans won the majority in the Senate and solidified their lead in the House of Representatives. What does this mean for your portfolio?
Investors tend to put too much weight on the impact of politicians on both the economy and the stock market. Economic trends happen over long periods of time and stock markets are driven by so many different things, of which politics and legislation are a small part. There are numerous studies that have shown which political party is better for the stock market. There are two major errors with those studies. First, there aren't near enough data points for them to be statistically significant. Second, there are literally hundreds of other variables that are impacting the stock market so it is disingenuous to attribute market returns to an elected official. George Bush presided over one of the worst stock markets in history. Is it fair to say that his administration caused this? Anyone looking at it objectively would have to say no. The stock market had two decades of growth and was at the end of one of the largest bubbles in history when he took office. It certainly was not his fault that the bubble burst. It was bound to happen.
Conversely, Barack Obama has led the country during one of the best stock markets in decades. He was lucky enough to take office at the bottom of one of the worst economic periods this country has ever seen. It would be hard to argue that Obama's economic policies led to these fantastic returns. As with many things in life, timing is everything.
Next time you hear a politician take credit (or assign blame) for the economy or stock market, tune it out. They really had little to do with it.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.