Investors Should Ignore US election, Says Academic

Thursday, November 1, 2012

Investors Should Ignore US election, Says Academic

Investors all around the world are focusing their attention on the result of the United States presidential election next week, but a Massey University finance lecturer says the best investment strategy is to just ignore the outcome.

Dr Jeffrey Stangl, from the School of Economics and Finance, studied the industry returns for presidential election cycles from 1926 to 2006 – and found no evidence that political cycles drove the performance of particular sectors.

“It’s intuitive to think that the defence industry, for example, will do well under a Republican president because the Republicans spend a lot on defence contracts,” Dr Stangl says. “On the other hand, when the Democrats are in power, people believe their support for unions will translate into sectors like the automative industry performing well.

“These ideas are widely reported in the media – check out Sam Stovall’s Sector Watch for Businessweek for an example – but when you look at the numbers, it’s just not the case.”

Dr Stangl’s research into presidential election cycles is unique because it looks at the performance of stocks grouped by industry over an extended period of time. While previous research has shown that markets respond to whether a president is a Democrat or a Republican, the movement is often short-term and unpredictable in nature.

“At the end of the day, what we care about as investors is whether there is a profitable strategy that can be implemented,” he says. “When Reagan was elected, for example, the markets were euphoric in the short-term, but not in a way that let you predict which stocks to place your bets on.

“If you used the election of a Republican president as a signal to buy defence stocks and hold them for the next four years, would that translate into anything meaningful? The answer is no.”

Previous research has shown that the US stock market, as a whole, does better under the Democrats by about 9 per cent. Dr Stangl crunched the numbers to see if specific industries could provide an explanation for this – and again drew a blank. He believes the better market-wide performance is due to macroeconomic factors that impact stocks from all sectors.

Investors could consider investing in a market index when a Democrat president is elected, Dr Stangl says. Otherwise, he believes the best strategy is to just ignore the US presidential race all together.

“I wouldn’t pay any attention to the elections at all and keep my money where it is, based on value fundamentals,” he says. “I certainly wouldn’t be targeting particular industries based on the outcome.”

Picture caption: Dr Jeffrey Stangl, senior lecturer at Massey University.

ENDS

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