Should investors bother about election results?

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The 2020 New Zealand general election will be held after the currently elected 52nd New Zealand Parliament is dissolved or expires. It is a chance for Kiwis to vote for not only who will lead our country for the next three years but also who will take charge of our COVID-19 economic recovery.

The U.S. Presential Election is also this year, held in November. Although the outcome of any election is uncertain, one thing we can count on is that plenty of opinions and predictions will be floated in the months and days leading up to Election Day.

In financial circles, we will almost certainly hear perceptions and views of market impacts. But, do election results really matter and need to be followed closely by long-term investors, or is it just noise that needs to be ignored?

Investing during an election year can be tough on the nerves and 2020 promises to be no different. Politics can bring out strong emotions and biases, and it is natural to draw a connection between the government in power and the influence they may have on markets. However, many renowned economists and their in-depth studies would caution investors against making short-term changes to long-term plan to try to profit (or avoid losses) from changes in the political landscape.

Benjamin Graham, the father of value investing, famously noted that “In the short run, a market is a voting machine, but in the long run, it is a weighing machine.” Maybe he wasn’t literally referring to the intersection of elections and market volatility, but markets can be more volatile during election years, with sentiment often changing as quickly as candidates open their mouths, which we are witnessing in New Zealand politics.

But Graham first made his analogy in 1939, in his seminar book, “Security Analysis.” Since then there have been 22 presidential election cycles in the U.S. and 26 general elections in New Zealand. We have analysed them to help you prepare for investing in these potentially volatile periods.

Predicting which party wins the election:

There’s nothing wrong with supporting a candidate or a party to win, but investors can run into trouble when they place too much importance on election results. That is because evidence suggests elections have, historically, made no difference when it comes to long-term investment returns.

“Presidents & Prime Ministers get far too much credit, and far too much blame, for the health of an economy and the state of the financial markets,” says economist Darrell Spence. “There are many other variables that determine economic growth and market returns and, frankly, presidents have very little influence over them.”

NZX50 index from 1 July 1986 - 31 August 2009.Source: Effects of New Zealand General Elections on Stock Market Returns by Sazali Abidin, Clare Old and Thomas Martin

NZX50 index from 1 July 1986 - 31 August 2009.

Source: Effects of New Zealand General Elections on Stock Market Returns by Sazali Abidin, Clare Old and Thomas Martin

What should matter more to investors is staying invested. Although past results are not predictive of future returns, a NZ$1 investment in the S&P 500 made when George H. W. Bush took office in 1989 would have been worth NZ$21.89 today. During this time there have been two Democratic and three Republican presidents.

Likewise, a NZ$1 investment in the NZX 50 made when Geoffrey Palmer of the Labour Party became New Zealand Prime Minister in 1989 would have been worth NZ$17.02 today. During this time there have been four Labour and four National prime ministers.

It is clear that getting out of the market to avoid a specific outcome in politics could have severely reduced an investor’s long-term returns.

Source: Dimensional Returns Web

Source: Dimensional Returns Web

Trying to time the market:

A study discovered that since 1992 investors have poured assets much more often into cash or low-risk funds leading up to elections. And by contrast, equity funds have seen the highest net inflows in the year immediately after an election. This suggests that investors may prefer to minimise risk during election years and wait until after uncertainty has subsided.

But market timing is rarely a winning long-term investment strategy, and it can pose a major problem for portfolio returns. To verify this, a U.S based adviser group analysed investment returns over the last 22 U.S. election cycles to compare three hypothetical investment approaches: being fully invested in equities, making monthly contributions to equities, or staying in cash until after the election. They then calculated the portfolio returns after each cycle, assuming a four-year holding period.

The hypothetical investor who stayed in cash until after the election had the worst outcome of the three portfolios in 16 of 22 periods. Meanwhile, investors who were fully invested or made monthly contributions during election years came out on top. These investors had higher average portfolio balances over the full period and more often outpaced the investor who stayed on the sidelines longer.

US election cycles vs stock market performance.png

Bottom line: Staying on the sidelines has rarely paid off. It’s time, not timing. If you are nervous about the markets in 2020, you are not alone. Elections often draw attention to the country’s problems, and campaigns regularly amplify negative messages. But with some guidance from a disciplined adviser, successful investors always stay the course and rely on time in the market rather than timing in the market.

Remember, people have lost more money waiting for the right time to invest than those who have stayed with the market in all phases.

  • The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz