by John Kernan

There are many hotly debated topics concerning the presidential candidates. One that people come to us about time and again is, “Who would be better for the markets?”

Markets hate uncertainty. Even uncertainty about two outcomes that are mostly neutral can push markets lower. While Trump supporters may believe that his pro-defense, conservative stance might provide more stability, Clinton supporters fire back with the fact that Trump is an unknown quantity and brings uncertainty. Clinton would be a known quantity, for good or for ill, and is often viewed as an extension of the current administration.

It is tempting to look to historical averages to get a better idea of what result would have the best effect on the market. Indeed, we found plenty of articles online that do just that. However, some very basic statistical analysis- just looking at the numbers- shows us we can’t rely on those averages. There are simply far too few elections for any average to make sense.

To analyze the effects on the market, we need to look at elections where no incumbent was running, of which there have been only eight in the last century. One of those, in 1928, had a 49% gain- which had more to do with speculative trading and the roaring 20’s than the election of Herbert Hoover. Similarly, it was the housing crash and financial crisis, not the election of Barack Obama, that led to a 31% loss in 2008. So, we look elsewhere.

Trump’s plan for a wall and increased immigration policing can be partially offset by decreased military spending. His plans are to support larger, more powerful armed forces with less money. However, his proposal to institute big tax cuts that are revenue neutral are under intense scrutiny (and sometimes ridiculed) by professionals. The Committee for a Responsible Federal Budget (CRFB) estimates Trump’s plan will reduce federal revenues by $10.5 trillion in the first decade, and increase debt by $11.5 trillion. Trump counters that his plan would generate enough growth that it would more than pay for all of the spending. The CRFB disagrees.

Clinton also looks to increase spending, but would increase debt by $250 billion, close to where it would be without any changes at all to the current plan. The difference is a tax increase on high earners and businesses. Without the promises of large tax reductions, her budget plans look much easier to realize.

There simply is not enough to go on here to justify a change in investment policy. Whether Clinton means lower growth, or Trump means higher borrowing costs, or vice versa, anything that is knowable is already priced in to the market. While some investors might believe they have a special understanding of the international debt markets, for example, and can earn a premium over the next several months, that is not how we believe most people should be investing.

We find it very unlikely that either candidate will by themselves cause the financial markets to change their patterns of risk and return. We continue to watch individual stocks for their exposure to tax plans that may affect their business—aerospace companies like Lockheed Martin, for example. But no election result would likely cause us to reallocate money out of, or into, different asset classes.  Furthermore, because indexes like the S&P 500 are market capitalization weighted, as the price of a stock increases, the stock receives a greater weighting in the index.  This conflicts with what we focus on as value investors – buying securities as they fall in price.