For Investors, Election Years Can Be Easy

Ah, the partisan electricity of an election year! The hot-gas-bag-bluster pollutes our media-saturated senses all year round. It’s a blessed thing for the stock market, and in a variety of ways. Call me non-civic, but investors shouldn’t care a wit who wins the White House this year.

Election years are routinely dominated by news that doesn’t much matter. In today’s WSJ, for instance, there’s no less than 3 full pages analyzing GOP primaries—will it be Romney, Santorum or David Lee Roth? (There’s still time for a Diamond Dave write in!) This is great because you can ignore virtually all of it—primary results, and the daily hem-haw-squabble feel important but actually don’t affect stocks much. Meanwhile, news of continued global economic expansion and waning European debt fears are crowded out. This is traditionally fertile territory for a rally, and while the ghosts of 2008 will haunt many, 2012 seems to fit the larger, more benign historical mold for presidential fourth years.

More importantly, election years are overwhelmingly positive for stocks, no matter who wins. Since 1926, the average election year return if an incumbent Democrat wins is 15%, and 19% if a spanking new Republican wins. Either outcome is just fine.

This isn’t just numerology—with folks focused on elections (media, citizens and candidates alike) there’s little room for big new regulation or other heinous derailments of otherwise functioning business. There’s a frequent view the Beltway must “fix” the economy. That’s backwards (and also gives me the jibblies): In general and through developed-world history, the more politicians keep their hands off, the more economies and markets otherwise move ahead. Regulatory rule changes, even the seemingly benign ones, require adjustment—what economists call a “deadweight loss” (don’t get me wrong, I still love a good tax cut). Election years are great, then, because economies mostly go on their merry way while breathless Beltwayers resolve themselves to campaigning. Bicker away!

The effects of a new or incumbent president likely won’t be felt till well into 2013 anyway. While markets generally anticipate policy, a new congress and new presidential term shouldn’t get to anything meaningful on the legislative slate till far into 2013—no point or sense in fretting over it now, markets won’t.

Lastly, in elections, we always get a winner. Always! More people vote for the winner than the loser (ok, ok, 2000 notwithstanding). Which means more people will be happy than sad about the outcome. At worst, this is neutral for market sentiment, but possibly provides a decent short-term pop toward yearend.

When it comes to the election, as a civic-minded citizen, worry about it, argue about it, chat about it...all you like. But as an investor, sit back and enjoy the show while the stock market does its thing.

Source: Global Financial Data, as of 12/31/10