“It’s great not to care,” he said.
But it isn’t always easy. With the clock ticking down on $607 billion in automatic spending cuts and tax increases come Jan. 1 — not to mention another fight over the country’s legal borrowing limit — the election’s toll on your portfolio may loom large.
But it is not as big as it seems. Academic studies are mixed on how big of a cue Wall Street takes from the party controlling Washington. Others argue that more important decisions — such as the Federal Reserve’s setting of interest rates — hold bigger sway over markets. And even when taxes are set to change on a given date, taxes should never be the main driver for an investment decision.
“I think the smart money is focusing a lot less on the election and . . . recognizing that, at the end of the day, Washington can only do so much,” said Burt White, chief investment officer at the advisory firm LPL Financial in Boston. “The emotional money is focusing more on the election.”
Butter in Bangladesh?
Still, experts are hesitant to dismiss studies of investment returns and election results as just another “butter in Bangladesh” experiment. In that study, David Leinweber, author of “Nerds on Wall Street: Math, Machines and Wired Markets,” famously discovered that when he searched a non-financial database for a data series that most closely tracked the Standard & Poor’s 500-stock index, butter production in Bangladesh took the top spot — a clever way of showing that you can sometimes correlate two completely unrelated things.
When it comes to stock returns, “the economy is the most important variable by far,” said Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School and author of “Stocks for the Long Run.” And because the party in power sets the agenda for the fiscal policies shaping the economy, it is reasonable to wonder how stocks fare under Democrats vs. under Republicans. In his book, Siegel estimates that the S&P 500 has on average achieved an annualized nominal return of 10.9 percent under Democratic administrations, compared with 8.6 percent under Republicans. Overall, the market returned 9.6 percent, based on data from 1888 to October 2006.
“History shows markets have done very well under Democrats,” Siegel said.
A 2003 study by academics Pedro Santa-Clara and Rossen Valkanov also noticed higher returns during Democratic administrations — a finding they dubbed “the presidential puzzle.” But the finding was challenged in a 2007 study that found differences in stock market returns under Democrats and under Republicans to be unmeaningful.