In early 2012, investment firm Edward Jones surveyed 1,000 clients and discovered that 90% of them planned to make changes to their investment strategy in the next year. The most popular reason for making changes was, by far, the upcoming presidential election. I haven’t seen a survey yet this year, but like every other election year, I have no doubt that investors will face plenty of pundits touting “can’t miss” strategies based on the outcome of the election. With this in mind, I wanted to demonstrate how dangerous some of this advice can be.
Generally, the advice comes in two forms: which stocks to buy and which to avoid. In 1996, Tacoma’s daily newspaper, The News Tribune, cited research which showed that small stocks outperformed under Democratic administrations and large stocks outperformed during Republican administrations. Based on this research, the paper offered the following investment advice: “So, the message is clear: If Bill Clinton wins, think small; if Bob Dole wins, think big.” The resulting returns were just the opposite. During President Clinton’s last term, small-cap stocks returned far less than large-caps. After Republican George Bush took office in 2001, small-caps more than doubled the performance of large-caps. Hopefully few investors took this advice, since doing so would have resulted in more than a decade of substantial underperformance.
More recent examples include 2008’s can’t-miss investment: “green” energy. Jim Cramer, host of CNBC’s Mad Money, put it this way: “An Obama victory would also be good for solar and wind power. My number one solar pick would be First Solar.” Unfortunately for Cramer and his followers, solar shares fared poorly as a group, and First Solar fell more than 80% by the end of President Obama’s first term. Others were less sanguine, though no less wrong, about the prospects for market gains if Barack Obama were elected president. In his November 2008 Forbes column, Trim Tabs Investment Research President and CEO Charles Biderman predicted stocks would crash “through the next year” if Obama became president. Readers acting on his guidance would have missed one of the greatest bull markets in history, as the stock market soon rebounded from the 2007-09 bear market. Biederman wrote a similar article for Forbes in late 2012, predicting that the economy would quickly fall into recession if President Obama were re-elected. It didn’t.
To be clear, it’s unlikely that any president or administration has much influence on stock returns over any meaningful length of time. In fact, that’s really the point. That’s not to say that elections aren’t important. For a number of reasons that extend well beyond stock prices, they certainly are. But when it comes to investing, politics may matter much less than we are sometimes led to believe. Economics, for example, matter far more. For this reason, any simplistic investment strategy based mainly on the occupant of the White House is likely to be disappointing.