by Amine Bouchentouf
Gold reacts more positively to post-election certainty and stability than to who's in the office. With the presidential election only a few weeks away, the American electorate is being bombarded on an hourly and daily basis by information (some of it accurate, most of it not). With so much information out there, it can be very confusing for investors (as well as voters) to determine what's relevant from what's frivolous and what's accurate from what's misleading. In this week's column, we will examine the current state of political and economic affairs and provide some insight into the coming election and what it means for your portfolio.
Before we delve into specifics, we have to ask the all-important question: Do presidential elections affect the markets? Unfortunately, while this is a straightforward question, the answer is not as simple as investors would like. For example, while studies show that the stock market performs better under Republicans during the first year after an election, studies also show that the market performs better during the overall four years under a Democratic president.
Specifically, markets increase 75 percent of the time under a Republican president versus 58 percent of the time under a Democratic president during the first year of office. However, during the total four-year term in office, markets perform better under Democrats than under Republicans by a factor of almost 2-to-1.
Those figures may change depending on several external factors. For example, it depends if the incumbent party loses or wins a second term. Markets decidedly favor stability and tend to perform much better during the second term of an incumbent president rather than the first term of an incoming president. Specifically, markets have historically increased by 15 percent if the incumbent president wins a second term versus a drop of 5 percent if the incumbent president loses.
So all in all, it would seem that markets favor incumbent Democratic presidents in the long term. However, this isn't an exact science. There are so many other political factors that have to be taken into consideration, such as the political control of both houses of Congress, fiscal policy and budgetary planning.
The bottom line is that presidential elections do have an effect on the markets and your portfolio, but it is not an exact science. Therefore,we do not recommend taking portfolio decisions solely on the basis of presidential politics—it is an additional metric to use, but certainly not the only one.
Presidents, Commodities And Gold
In addition to the broader stock market performance, the outcome of presidential elections may have a significant influence on commodities markets as a whole. Let's take a look at gold. Over the last few election cycles, gold prices have tended to drop or stay flat during the election year, only to see positive performance throughout the rest of the term. Let's take 2012 as an example. While gold prices are up 9 percent year-to-date, that's primarily due to an almost 10 percent rise between the months of August and September. On the flip side, you see that gold prices have actually decreased by 3 percent since late September until now, less than two weeks from Election Day.
If history is an indication, now is a good time to start loading up on gold. If you missed the recent rally, then this may be the right time for you to jump back in. With the election so close, history suggests that gold prices will begin another uptrend soon after a winner is announced.
Gold markets—unlike the broader stocks and commodities markets—don't discriminate based on which political party enters the White House. Rather, gold markets are more interested in stability and market visibility. This has been the case throughout the last decade and looks like it will be the case in this coming cycle as well.
At the end of the day, who enters the White House is important; however, it's not as important as the actual policies that are implemented and which will have a broader effect on the economy and the markets. The astute investor will therefore analyze the fiscal policies and budget policies implemented by the president-elect to determine how those changes will affect their portfolio. While the election is a critical moment in time, the work done after the election is the deciding factor for markets.
Disclosure: The author doesn't have any positions in the stocks mentioned.