Can You Predict Postelection Winners?
The types of businesses that stand to benefit from a new administration may seem predictable, but be careful about letting that factor into your allocation.
A common investor focus after elections is speculating on what types of businesses stand to benefit from the new administration’s political agenda. While there’s always uncertainty over how much of this agenda will be implemented, investors may feel they have a sense for which sectors will be impacted. But those expectations may not help predict which stocks will outperform.
Markets quickly incorporate new expectations following election outcomes. Once the ballots are counted, stock prices reflect, in real time, investor expectations about things such as regulatory or tax policy changes. When these new expectations are baked into prices, we should not expect an election effect to persist.
This is supported by tracking top- and bottom-performing sectors postelection. For example, the election month winners outperformed the US market by over six percentage points on average during the election month but performed in line with the market during the newly elected president’s full term. Election month losers showed similar lack of persistence.
The beneficiaries of the new administration may seem predictable, but be careful about letting that factor into your asset allocation decisions.
EXHIBIT 1
Presidential Election Month Winners and Losers
Equity sector winners and losers, average monthly returns vs. the market, 1928–2024
Index Descriptions
Fama/French Total US Market Research Index: July 1926–present: Fama/French Total US Market Research Factor + One-Month US Treasury Bills. Source: Ken French website.
Results shown during periods prior to each index’s inception date do not represent actual returns of the respective index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP.
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