Investing Archives

You, the Stock Market, and Your Election Fears

presidential-party-24-hour-usePresidential party affiliation does not matter when it comes to the stock market.

Presidential party affiliation does not matter when it comes to long-term stock market performance.

This perhaps provocative notion was advanced in the Dimensional Funds Advisors article below. They wrote, “….over the long run, the market has provided substantial returns regardless of who controlled the executive branch.” Part of Dimensional’s proof is a graph showing the growth a dollar invested in the S&P 500 index since 1926. Investment growth under Democrats is highlighted in blue and Republicans in red. Some may argue that performance is better under Democrats. We know that performance under a couple of Republican Presidents was poor. But under Democrat Presidents, better performance coincided with periods of more volatility or risk. Investors expect greater rewards for greater risk, so better performance should be expected. This is what the Federal Reserve Board staff working paper, “Alternative Estimates of the Presidential Premium,” found. After adjusting for risk, the authors concluded: “the apparent discrepancy between the stock market performance of Democrats and Republicans is largely reduced.”

You know regret if you have ever sold a fund or stock only to see it rise shortly afterwards. Worse yet is when the fund or stock you purchased to replace the one sold underperforms. Some index funds systematically duplicate these regretful transactions through what is called “Index reconstitution.”  As you might suspect, such transactions drag performance down. The widely-tracked Russell index series reconstitutes every June. This year it is Friday June 24, 2016.

 

Crude Oil and Stocks

Sources: International Monetary Fund, Global price of WTI Crude [POILWTIUSDM], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/POILWTIUSDM, March 25, 2016. January and February prices from U.S. Energy Information Administration, Crude Oil Prices: West Texas Intermediate (WTI) – Cushing, Oklahoma Online Data Robert Shiller, S&P 500 Composite, U.S. Stock Markets 1871-Present and CAPE Ratio

As-seen-in

 

A case study in just how easily the media’s headline predictions and warnings can mislead is attached in the essay below. In this essay, Weston Wellington reveals the difficulty of achieving superior investment performance by connecting the economic and financial news dots from 2014.

In an above-average, Lake Wobegon world, financial news would give us a leg up. The reality is that most of what passes for news has been anticipated or acted upon by a lightning-fast trader. This “news” offers no advantage. Better to think like Warren Buffett: have a strategy and exercise patience in executing it. A few pithy Buffett quotes illustrate the idea:

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