Questions about how the election will influence markets are probably the most common inquiries advisors have been fielding over the last couple of months. It’s the same for every big election. The answer is pretty easy.
It doesn’t matter.
It’s not that the election is of no consequence – quite the opposite. It matters a great deal when it comes to policy decisions, the role of government, foreign relations, etc. But it’s a mistake to make investment decisions today based on an election that hasn’t been held yet. Here are a few reasons why:
- You don’t know who will win the election yet. Even if you did know, unless it’s a longshot candidate that comes out of the blue to shock everyone on election day, knowing in advance simply puts you in a select group of a couple hundred million people that read the same news and watch the same polls . There is no edge to be gained here.
- Even if we did know the winner in advance, we wouldn’t know which of their policies will be enacted and the final details of those policies.
- Even if we did know the winner and the details of his enacted policies in advance, we wouldn’t know the actual effects of that legislation. Government policy and unintended consequences go together like peas and carrots. Think of the creation of Fannie Mae, Freddie Mac & the FHA and their eventual hand in the implosion of the housing sector.
- Even if we did know the fallout of the unintended consequences, we wouldn’t know the timing. It took seventy years for Fannie Mae to reap the whirlwind.
- Even if we did know the fallout and the timing, we still wouldn’t know how the market would interpret those events. For example, consider the decades of financial mismanagement and political brinkmanship that ultimately led to the downgrade of the U.S Treasury credit rating in August, 2011. Even had you predicted that outcome, the ensuing massive rally in treasury bond prices wouldn’t have made any sense unless you had also predicted the interconnected series of events happening in Europe and Asia at the same time.
There’s a difference between information and information that you can use. When it comes to managing investments, speculating on the outcome of the election is a waste of time. A more useful tactic is to simply focus on making fact-based decisions while managing risk. Less guessing, more pruning.