Tuesday, November 6, 2012

How will Today’s Election Affect the Stock Market?

I’m of two minds about today’s U.S. election. On the one hand, voting is an important democratic right and Americans should get out and vote. On the other hand, when my son was young and didn’t want to wear a warm top, I used to placate him by letting him to decide if he wanted to wear a red one or a blue one.

The conventional wisdom is that electing a Republican will boost stocks, and electing a Democrat will sink stocks. There are many people who try to profit from short-term stock moves caused by election results. These people are already taking into account recent polls. So, everything I know about the likely outcome of today’s election is already factored into stock prices. I don’t think there is any easy short-term money on the table.

But what about long-term effects on stock prices? Maybe one of Obama and Romney would be better for business overall. But how can I profit from this? Stocks tend to rise in price faster than bonds. Maybe this gap in expected growth rates will be different depending on who wins the election. But, so what? If the risk premium remains positive, I should have some of my money in stocks no matter who wins the election.

In the end I can’t see any reason to deviate from my current plan to maintain a broadly-diversified low-cost index portfolio. I don’t plan to make any changes immediately before or after the election no matter who wins.


  1. IMHO, whoever wins index will rise. It may be driven by different companies, though. Prior to every election gamers put bets on one of the candidates. Less adventurous, but numerous investors, hold their money till they think they know which way the market will go next, that is till after the election. When results are announced, they move the money. Since trillions of dollars have been moved already to bonds, other trillions invested in gold, and still another trillions sit in cash, the only possible next move may be towards stocks. Therefore, whoever wins index will go up.

  2. @AnatoliN: You may turn out to be right, but I don't pay much attention to such predictions. As I said, I will just stay the course on my investment strategy.