The recent mid-term elections brought about plenty of discussion regarding the impact on investments. Much of the generally accepted "wisdom," however, simply isn't supported by facts. For example, Republicans are often viewed as more "pro-business" than Democrats, and Wall Street folklore says that the market prefers Republicans. Yet, the numbers don't support this belief.
A recent study covering more than 120 years of data concluded that stock returns were almost identical under Democratic and Republican presidents. Post-World War II, stocks performed slightly better under Democratic administrations, including the recent 40% return since President Obama took office. No matter your political leanings, there is scant evidence that your portfolio will fare better if your party of choice occupies the Oval Office.
Another widely held belief is that political "gridlock" is good for the market. The logic is that with divided government it's unlikely that major legislation will be passed that will hurt business (and therefore stocks).
Once again, the data does not support the theory. According to research from Standard & Poor's going back to 1900, when the House and Senate were controlled by different parties (gridlock), stocks generated returns below their long-term averages. This has not occurred often, but gridlock does not appear to benefit stocks.
While these two dictums are without empirical proof, it is often wise to be skeptical even when the data seems to support such ideas. One of the dangers of inferring too much from past data is the potential for spurious correlation - a fancy way of saying that an apparent link might simply be a coincidence. One example is the well-known "Super Bowl Stock Market Predictor," where the winner seems to "forecast" the direction of the stock market with 79% accuracy. Another is the tongue-in-cheek research that showed butter production in Bangladesh explaining much of the variation in the S&P 500 stock index. Few would argue these associations are anything more than simple chance.
Clearly the factors that impact the economy and stocks are numerous, and it's impossible to ascribe market performance to one single data point. Global events and Federal Reserve actions are two of the many elements that may have a greater impact than domestic politics.
The next time you hear an old investment adage repeated as truth, keep in mind that conventional wisdom is generally not a solid foundation for a successful investment policy. The best strategy is good risk management, keeping costs low, broad diversification and playing great music over the "noise" of all the "wisdom" you hear.
