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What Stocks Do After Elections

By Morgan Housel - Nov 5, 2012 at 12:05PM

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A short history of elections.

You're going to see more versions of "If X wins the election tomorrow, here's what stocks will do" over the next 24 hours than you can shake a stick at.

Try as hard as you can to ignore it all. History makes one thing clear: There is little correlation between elections and stock performance -- particularly in the short run.

Here's how the inflation-adjusted S&P 500 ( ^GSPC -1.90% ) has performed six months and one year after the last 17 presidents took office (keep in mind: Johnson and Ford became presidents without direct elections):

Election

S&P 500 Change 6 Months After Start of Term

S&P 500 Change 1 Year After Start of Term

1952: Eisenhower

(7.9%)

(3.8%)

1956: Eisenhower

(1.6%)

(12.7%)

1960: Kennedy

8.8%

14.9%

1963: Johnson

16.4%

16.1%

1964: Johnson

6.9%

11.6%

1968: Nixon

(11.3%)

(16.6%)

1972: Nixon

(17.2%)

(25.8%)

1974: Ford

0.3%

3.8%

1976: Carter

(2.8%)

(18.6%)

1980: Reagan

(7.8%)

(18.5%)

1984: Reagan

7.2%

16.8%

1988: G.H.W. Bush

13.2%

13.2%

1992: Clinton

2.8%

5.7%

1996: Clinton

19.7%

23.8%

2000: G.W. Bush

(13%)

(15.6%)

2004: G.W. Bush

0.6%

4.1%

2008: Obama

14.1%

26.5%

Source: Robert Shiller.

There is no discernible post-election pattern here; we've seen everything from big booms to sizable corrections. And there's little correlation between market performance six months or a year after presidents take office and performance over the course of their administrations. Stocks did poorly soon after president Ford took office, but they did remarkably well later in his term. The same goes for president Reagan.

As I wrote earlier this year, the vast majority of investment calls based on "Buy these stocks if X wins the election" turn out woefully wrong in hindsight. Some examples are astounding, like advice to buy small-cap stocks if Bill Clinton won in 1996 -- just as small caps were about to underperform large caps by half. Or calls to buy solar stocks and avoid Big Oil after president Obama was elected in 2008, just as companies like First Solar ( FSLR -3.04% ) were about to collapse and Big Oil giants like ExxonMobil ( XOM -2.84% ) were set up for big returns. It is extremely difficult to tie what the stock market will do to who wins a presidential election.

This is partly because what candidates campaign on is usually vastly different from what they do in office. Elections encourage a habit of overpromising, and opposing Congressional parties can constrain a president's ambitions. Whatever the reason, we have experienced every combination of Republican and Democrat president, bull market and bear market, that you can think of. People hate to think of the economy as that unpredictable, but it's the reality. The odds are quite good that the most important business stories of the next five or 10 years will have nothing to do with who wins the election tomorrow.

So keep in mind this week that:

  • You should want to own good businesses.
  • You should want to hold them for a long time.
  • You should want to buy them at great prices.
  • None of those three should be materially influenced by who wins the election.

In other words, buy companies -- not politics.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$4,567.00 (-1.90%) $-88.27
Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
XOM
$59.84 (-2.84%) $-1.75
First Solar, Inc. Stock Quote
First Solar, Inc.
FSLR
$103.60 (-3.04%) $-3.25

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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