Politics, investments, and change

Reaching back to the days of cigars and scotch in saloon backrooms, politics and business have mixed. Maybe it's that they are both abstract in a way, though investments have the advantage that they are numerical. At the end of the day, one path is right, and another path is not-so-right.

As the election season goes into override, my advice is to decouple political thoughts from investment actions. The coupling seems natural, and it's easy to convince yourself that your political ideas must have some bearing on the economy and markets. It's easy to convince yourself because, in such a broad field, you can find some information that in hindsight will be correct.

Whether a Republican or Democrat wins the White House, it doesn't look like it will be a determining factor in the direction of markets. I see news stories stating one party outperforms the other all the time. But this study from the Federal Reserve Board and the University of California claims:

Once the effect of stock market performance during rather volatile market environments is controlled for the apparent discrepancy between the stock market performance of Democrats and Republicans is largely reduced. Accordingly, the apparent disconnect between risk and return is partially resolved: these results are consistent with the notion that neither risk nor return is significantly different across the presidential cycle.

Add to this the possibility, which few of these investigations consider, that the effect of an administration's policies may well have a lag time in effect and market response, and you end up with a murky picture. This becomes similar to a financial graph: if you change the start and end dates, you can change the meaning quickly.

The long and short: the election probably matters to you a lot for personal reasons, but it's not going to predict the markets.

Regardless of their political alignment, many people want the financial industry to change. It's tough to argue that sales of A shares, oversized spreads on bond trades, Unit Investment Trusts (UIT's), or commissions paid on product sales are great for society.

Keep in mind this is something you can control, you don't have to wait for a politician or a regulation. If you look at your own situation and reduce the cash flow you are paying to firms not behaving well, you are part of the solution.

Dan Cunningham

(1) Alternative Estimates of the Presidential Premium, Federal Reserve Board

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