Election Results Could Provide Good Backdrop for Investors
The stock market’s reaction to the odds-defying win by President-elect Donald Trump highlighted how difficult it is to predict and profit from political events. “Investors dislike uncertainty,” said Andrew Givens, First Fiduciary’s Senior Analyst. “Trump’s surprising win removed a major overhang for market participants. The perceived lack of government interference in two key sectors (financials and health care) helped drive a sharp rally after the election.”
With the eventful 2016 General Election now behind us, it is time to look ahead to what the results might mean for the stock market. The Republican Party will soon control the White House and both houses of Congress. Conventional wisdom suggests that divided power should be preferred. Gridlock, it’s assumed, makes it tough for the government to get things accomplished, allowing markets to flourish. However, this point of view is not supported by the data. In fact, according to InvesTech, the S&P 500 has gained 16.9% on average in the two years following an election when one party controls the White House, the Senate, and the House of Representatives since 1928. The return has been 15.6% when one party controls Congress and the other party sits in the White House, and just 5.5% when Congress is divided.
It can be tempting for investors to try to profit by owning the companies and industries that might benefit from the regime change in Washington. “At First Fiduciary, we take a different tact. We tend to avoid companies that require government influence (or lack thereof) to outperform. We want to own quality, market leaders that can thrive in any political backdrop,” said Givens. “By investing in companies with great balance sheets and sustainable competitive positions, we eliminate the need to predict election results. Remaining committed to our investment process has allowed us to generate solid returns for our clients since the firm’s inception in 1975.”