Markets

Stocks slammed post-election

By Allan Roth

November 7, 2012 / 5:01 PM EST / MoneyWatch

(MoneyWatch) The U.S. and international stocks markets are giving up roughly twice the gains they clocked in on Election Day. [Update: The Wilshire 5000 was down 2.3 percent at the close of trading.] Was the selloff due to President Barack Obama's victory as the media headlines claim? Or are investors reacting to developments overseas? European Central Bank President Mario Draghi warned that Germany, the continent's largest economy, is no longer insulated from the eurozone troubles; stock futures tumbled after that comment.

I looked at how the U.S. stock market has performed on Election Day and the day after for some clues.

Since 1984, the U.S. stock market has averaged a 0.49 percent gain on Election Day and a 0.84 percent loss the day after, using the Wilshire 5000, the broadest measure of U.S. stocks. The biggest day-after loss of 5.12 percent came in 2008 when Obama won his first term. The largest day after gain came in 1996 when Clinton was elected for his second term. Excluding today, stocks declined 1.40 percent after a Democratic win and 0.60 percent after a Republican win. Historically, stocks have performed better during a Democratic presidency though this tells us a whole lot of nothing for the next four years.

What this tells us is very important -- past performance is not indicative of the future. I think Nate Silver would approve of me noting there is no statistical evidence whatsoever to have predicted an up market today. And the fact that stocks have historically performed better under Democrats than Republicans is a lousy reason to increase one's allocation to stocks.

Hopefully, our politicians can work together to solve the fiscal cliff. There are two things I never predict, however -- the stock market and politics.

Author's note: I initially used the incorrect number for stock returns on day after the 2008 election and appreciate the good folks at Wilshire Associates for pointing that out.

Allan Roth

Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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