Client Letter – Q3 2004

So what’s going to happen to the market after the election? That question seems to be on the minds of many individual investors these days. The implications are that the market will be affected by the election and in a different way depending on which party lands on Pennsylvania Avenue.  More importantly, the investor who asks this question is also wondering how to capitalize on a change, or continuity, in the White House. Don’t bother. The president of the United States wields great power as one of the most influential people in the world. But Wall Street does not seem to listen much to him.

A look at elections and markets since Eisenhower took office in 1953 shows little statistical linkage between market trends and election results, says Mark W. Riepe, an analyst at the Schwab Center for Investment Research. Riepe decided focusing solely on the presidency was too narrow. After all, it is the combination of the administration and Congress that gets things done.

Riepe divided administrations since 1953 into two groups: those where the president’s party controlled Congress and those where the other party dominate Congress. Of the 32 “gridlocked” years (those with a President of one party and Congress of the other party) average market returns were 14.08%, while the average for 19 non-gridlock years was 10.67%. While that looks significant, it isn’t. The sample of years is too small and there is only about a 50% chance that politics was having a market influence, Riepe says. For instance, if you take out Bill Clinton and George W. Bush the numbers reverse: non-gridlock years beat gridlock years, he says.

Why isn’t the correlation stronger? For one thing, many other factors—especially the business cycle and Federal Reserve policy—influence the markets. For another, the market quickly takes into account any political effect that may exist. It prices in the potential changes that may occur due to an election long before the election is held. For that reason, Riepe says, it is absurd for investors to think they can decide how the market will behave depending on which candidate wins and then make investment moves on November 3. Finally, political labels are imprecise. Some Democrats are more hawkish than Republicans while some Republicans are bigger spenders than Democrats.

Now, due to my crazy schedule this week, I need to keep this quarterly letter very short.   As you may (or may not) know, I just moved my personal residence from Palmer Township to Lower Macungie Township.  So, I am still recovering from that experience.  In fact, I just closed on the sale of my home this morning.

Many clients have asked whether my office location will change, and my answer (for now) is that it will be the same for at least the next year.  My commute is only about 35 minutes, which isn’t too bad.  As for the long term, I think that I will probably move my office closer to home in a year or two.  For now, I am just focusing on providing outstanding service to each of my clients.

I want to thank you for making this a wonderful year for Keystone Financial Planning. As always, I appreciate your business and your friendship.  Please call or send an email if you need anything.


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About Christopher Jones

Christopher Jones is the Founder and President of Sparrow Wealth Management, a fee-only financial planning and investment management firm. Before entering the investment field, Chris was a management consultant for Deloitte Monitor. He graduated summa cum laude from Brigham Young University with a B.S. in Economics and a minor in Business Management.