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U.S. Election Results Will Predict Which Stock Market Investors Are More Likely to Make Mistakes and Which Are More Likely be Wiser Says School Study

October 05, 2016
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The results of November’s U.S. presidential and congressional elections will determine which stock market investors are likely to make mistakes and which are likely to make wiser decisions according to a study from the School’s Department of Finance.

The research indicates that if Donald Trump is elected president and/or Republicans hold control of both houses of Congress, investors who prefer the Republican Party are more likely to see their investments outperform those of investors who prefer to have Democrats in control. On the other hand, if Hillary Clinton wins the presidency and/or Democrats take control of Congress, investors who prefer the Democratic Party will likely do better than those who prefer Republican control.

The researchers looked at statistics from 1991 to 2002, during which Democrats and Republicans each took turns in office. They collected data from the UBS/Gallup Investor Optimism Survey, in which respondents indicate their political affiliation, and from a large discount brokerage house, in which political preference was extrapolated based on ZIP codes and local voting patterns.

“We found that when investors’ preferred party was in control, they felt better about the economy and viewed domestic markets as undervalued and more likely to deliver higher returns,” said researcher Alok Kumar, the Gabelli Asset Management Chair and professor of finance at the School. “This drove them to hold more domestic stocks and take more risks. Ultimately, their portfolios performed about 2.7 percent better than those of investors preferring the opposing party,” added Kumar, who conducted the research with Yosef Bonaparte of the University of Colorado at Denver; and Jeremy Page, an assistant professor at Brigham Young University.

In contrast, the study shows that when the preferred party was in the minority, investors perceived greater market uncertainty. As a consequence, they held more familiar, local stocks; picked active mutual funds with high fees; and traded more actively. Perhaps not surprisingly, based on their increased trading frequency, the performance of their portfolios suffered.

The results were the same whether investors were Democrats or Republicans. They were also similar whether investors’ party of choice was only in the White House or had control of both the White House and Congress. The study also found evidence that the effect was stronger among less sophisticated investors.

“The takeaway for those of us investing in the stock market is that share prices of companies held more by investors of one party than another may become misvalued when the opposing party is in power,” said Kumar. “The stocks of these companies will be traded more actively, so prices are likely to be further away from the fundamental. For example, research has shown that Republicans are more likely than Democrats to invest in industry sectors such as tobacco, firearms, defense, logging and mining.”
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