Ignore the Politics: Focus on Fundamentals
The much-talked-about mid-term elections are over, but the volatility seen in the stock market over the past few weeks has set many investor’s nerves on edge. The votes are in and America has a new political party in control of the House while another controls the Senate. In response, the market showed higher volatility – adding to the building level of unease investors have been feeling for the past several weeks now.
Whatever the climate, investors shouldn’t neglect due diligence and fundamental analysis. Stocks are driven primarily by just one statistic – earnings. Regardless of the politics, if earnings are down, stocks will be down as well, and vice versa. While some investors may put emphasis on political ideologies and views towards business and economics, the real market mover is earnings results and overall economic health.
What role politics plays in the market
The stock market is highly resilient from a long-term perspective when it comes to political events. While short-term bumps and dips can happen, the market ultimately balances out as investor attention returns to fundamental analysis rather than political happenings.
Minor shifts in the market have been observed however following election cycles. It’s been observed that the market typically performs well after an election in which one party controls the House while the other controls the Senate. The reason for this is that the mixture creates an environment where no major changes can occur leaving the market free to operate without fear of interference.
Fundamentals to follow
Regardless of what the pundits might tell you, the numbers related to unemployment, GDP, inflation, and most other data is largely independent of Presidential activity. The economy is far too large and dynamic to be influenced by the actions of just one person, or party for that matter.
The direction of the market is influenced slowly over time which means that trends are where investors should concentrate their focus. Political parties rarely stay in power over both the White House and Congress for long which means that there isn’t enough time to make any significant changes that would re-direct the economy.
As with most news, investors shouldn’t pay more attention to it than the news deserves. While major paradigm-shifting events such as the terrorist attack on 9/11 have long-lasting repercussions, these “black swan” events are unpredictable and not considered in terms of typical market analysis and forward-looking guidance. Instead of getting distracted by the cacophony of Wall Street and media news stories, investors should remain vigilant in their own portfolios and keep doing their due diligence before making any investment decisions.