US election

That’s the surprising conclusion of a recent study titled, “What to Expect When You’re Electing,” which examined the impact of a president’s political affiliation in the context of monetary factors such as whether the federal funds and discount rates — both of which are set by the Federal Reserve — are trending up or down.

The stock market, on average, performs better when rates are going down than when they are increasing, the study found — and this is true regardless of the president’s party.

In short: “There is no systematic difference between Republicans and Democrats” in impact on the stock market, according to Robert Johnson, this new study’s lead author and president of the American College of Financial Services.

The fed funds rate is what banks charge each other for overnight lending, while the discount rate is what the Fed charges when it lends to banks. As a general rule, the Fed uses the discount rate to signal its longer-term monetary stance and the fed funds rate for shorter-term tightening.

The study is unique because it focuses on monetary factors as well as politics, according to Johnson. It appeared in Managerial Finance, an academic journal, and was co-written by Scott Beyer of the University of Wisconsin-Oshkosh, Luis Garcia-Feijoo of Florida Atlantic University, and Gerald Jensen of Creighton University.

If investors were to focus on just one political variable alone — the president’s political affiliation — they would “always vote Democratic,” Johnson said in an interview.

This is consistent with what numerous prior studies have also found: The stock market’s average return during Democratic administrations has been markedly higher than during Republican ones. In fact, this correlation has been so widely reported in the financial press that it’s now more or less common knowledge among many investors.

But, Johnson added, “we live in a multivariate world, and the political party of the occupant of the White House is but one variable. And when we include monetary variables in our models, they swamp all the political variables.”

The study also challenges another widely publicized conclusion of prior studies into politics and stocks — that political gridlock is good for the market. The researchers found that just the opposite is the case: Gridlock is actually bad for equities. Prior studies that found otherwise failed to properly analyze gridlock’s impact in the context of monetary conditions.

Yet there is one piece of conventional wisdom about politics and the stock market that does survive the study’s re-examination: The market’s pronounced tendency to perform well in the third year of a presidential term. This is true regardless of whether a Democrat or a Republican is in the White House, according to Johnson. (Note that this tendency won’t kick in until 2019.)

To be sure, the findings don’t mean it makes no difference which candidate wins on Nov. 8. There are significant differences between the economic policies championed by Hillary Clinton and Donald Drumpf, and it’s entirely conceivable that the stock market would do much better under one set of policies than the other. Instead, Johnson stressed, the implication of his study is that investors “should go into the voting booth and vote for what is the best economic policy,” not the political party label.

Following this advice won’t be easy, since few of us possess the ability to objectively assess a candidate’s economic policy. As I’ve discussed in greater depth elsewhere, the economic assessments and investment decisions we make are markedly different depending on whether our preferred presidential candidate wins or loses. When our preferred candidate wins, for example, we tend to incur more risk in our equity portfolios, trade less frequently, and weight our holdings more heavily toward domestic companies.

All this suggest that political considerations are far less important than previously thought when devising our investment strategies. There is relatively little evidence that they can help us perform better, and plenty of evidence that they can hurt.

For more information, including descriptions of the Hulbert Sentiment Indices, go to www.hulbertratings.com or email mark@hulbertratings.com.