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There’s little an investment strategist loves more than an election. As America heads to the polls on Tuesday, one sure bet is that strategists will be working late into the night on what the result means for the various asset classes. Sadly, the reports hitting clients’ desks on Wednesday morning will be as formulaic as they are unhelpful. But analysing elections is as essential a part of a strategist’s repertoire as long-run data comparisons or bizarre anecdotes about the industrial revolution.
Elections are sold as a crucial time for investors to reposition their portfolios, thereby incidentally generating commissions. In order to help clients along, strategists employ two time-honoured techniques. The first is to take a historical look at past elections relative to turning points. For example, how many times after a Republican has regained the White House have equities rallied for more than a month? Is the yield curve always steeper when the Democrats control Congress? What does the dollar do, on average, between election day and the new year?
The second popular technique employed by strategists is to ponder policy implications – from big-picture macroeconomic calls to small cap stock selection. Barack “big government” Obama, then, supposedly equals higher inflation while his proposed healthcare reforms and green credentials are negative for drug and oil companies. Luxury goods share prices, meanwhile, should celebrate John McCain’s more benign tax stance towards the rich. He is also a military guy, the logic goes, so that must be good for defence stocks.
In practice, however, such research has scant investment value. Patterns can always be found in historic data. Any real prospect for making money will have long been discounted. What is more, even during gentler times, back-testing shows that returns from punting election results are marginal. In these markets, where prices can move by more than 10 per cent in a day, there are easier ways to make (and lose) money.
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