Markets, Elections and SRI

You might be wondering what the impact of the recently concluded mid-term elections will be on your SRI (sustainable, responsible) portfolio. After all, the hoped-for social and environmental objectives of that portfolio do not exactly reflect the social agenda of the new conservative politicians who will be entering Congress early next year.

The answer might surprise you. Traditionally, the markets perform quite well leading up to and in the aftermath of mid-term elections, regardless of the results of those elections. In recent years, it has also been the case that the party of the President does poorly in those elections, and this time around was certainly no exception. Yet it is not the change in political power, or which party comes out on top, that seems to cause the markets to perform well after a mid-term election. It’s simply knowing the results.

Markets hate uncertainty. Knowing the election results, and the likely policies that will affect the economy thereafter, provides investors with more certainty about what to expect. They invest with more confidence. Indeed, since 1942 the Standard & Poor's 500 Index has posted gains for every 200-trading day period following mid-term congressional elections, and by an average of 18.3%! (Prior performance is no indication of future results.) Often, particularly when polls show a clear trend indicating how the midterms are likely to go, the up tick in the markets begins before the elections, and that certainly seems to have been the case this year.

Will stocks surge this time around? I don’t know, of course, but if they do there will be a certain pleasing irony for SRI investors. Given the election results, our portfolios will be bucking the trend, and challenging the status quo, even more than usual in the coming months. It will certainly be nice if they profit in the process.

Note: The views expressed herein are those of the author and do not necessarily reflect those of First Affirmative, its management or staff.