Election Year Investing: What Next

Posted on November 5, 2012 at 11:15 AM PDT by

Election year investing is tricky stuff. If you thought the political pollsters had a tough job, imagine trying to calibrate a few billion in assets under management around an unknown as big as the U.S. presidential election.

We are struck by the willingness, at least among financial journalists and analysts, to look for evidence of election year investing outcomes in various asset price movements. For instance, Barron’s wrote about how some strategists think the U.S. debt market is “pricing in” an Obama victory.

election year investing

The absurd implication of such election year investing logic is that a Romney victory must somehow signal an incipient bond market crash. Of course, both positions are ridiculous. Nobody knows what either candidate would — or even could — do about the bond market in three months, six months, or a year from now.

Just a few clicks away, the folks at MarketWatch are finding evidence that energy sector stocks, specifically coal stocks, are preparing for a Romney presidency. The reporter ends his piece on election year investing by backtracking on his own headline, writing that the story is “not a prediction.” Nevertheless, the casual online reader will draw the conclusion implied.

Naturally, that sort of presumption ignores supply and demand, weather factors, alternatives to coal that might be cheaper or more expensive, plus shipping and rail disruptions from storms. We had a big one recently, you might recall.

Nov. 6 could be a blip at best. Who knows?

Right down the safe middle of all this election year investing talk rides Mark Hulbert, the newsletter guru, who wisely cautions investors not to react at all to the election on Tuesday, either before or after.

It just doesn’t matter much, Hulbert explains:

Consider first all bull and bear markets since 1900. To come up with the precise dates on which these began and ended, I relied on the criteria employed by Ned Davis Research, the quantitative research firm. How many of the 35 bull markets on the firm’s list began or ended in presidential election months?

The answer? Virtually none of them.

All this election chatter reminds us of how key asset prices move on big economic news days. You might think that a stock or commodity price would be relatively calm before big news breaks — then go nuts as trading commences.

It’s often the other way around. Active traders spend a lot of time and energy building forecasts ahead of the big news headlines. Price swings just before a headline is out can be pretty crazy, thanks to all the last-second jockeying and leverage involved.

Once the news breaks: Boom! flatline. After the news is out there, there’s no tension left. Folks who wagered wrong set about trying to compensate for losses (they buy) while those who won big cash out and look for another opportunity (they sell).

The effect is quite calming. Markets seem to go nowhere when they should be careening all over the map, logically speaking.

Election year investing done right

Sure, you could try election year investing by trading sectors ahead of the vote, but chances are extremely high that, as an individual investor, you will get it exactly backwards. Not because you don’t have better data (you don’t) or more experience trading (you don’t) but mostly because it’s too easy to misread the intentions of the very high-volume, high-speed, high-everything professional traders.

The trick to election year investing is to stop trading. If you want to own a piece of the bond market, you could do that using Vanguard Total Bond Market ETF (BND). Likewise, iShares S&P Global Energy (IXC) has big oil and coal stocks in its holdings.

If either (or both) of these predictions works out, you get to be the trader who sells out high down the road. The larger point is to be in these types of asset classes as part of an intelligently allocated portfolio, not asset-hopping on extremely short-term news cycles on the expectation of a “pop” to come.