"Kee" Points with Jim Kee, PhD.

Well, according to PollyVote, the stories in the press are true and Hillary Clinton’s lead has indeed widened against Republican candidate, Donald Trump. In fact, at 54% Hillary’s chances are the highest they have been all year. This seems largely attributable to releases of Trump comments regarding women before and after the second presidential debate on October 9th rather than to the debate itself, although they both occurred around the same time. We’ll have the last debate this Wednesday, but I don’t’ expect it to change the outcome much. Most of the people I talk with - Republican and Democrat - just want to get beyond the 2016 election.

I will be talking briefly about some of the facts regarding asset returns and elections in our quarterly webcast, which will be released this week. A key takeaway is that there just really isn’t enough data to draw meaningful, definitive conclusions regarding elections, political parties, and stock and bond market returns. Going back to 1928, for example, yields 22 data points, and there is a lot of variability around them. The media tends emphasize the investment implications of elections a lot, no doubt to make things seem a little more exciting. But there are also a lot of intentional biases out there as well. The internet in particular is known as the “cult of the amateur” largely because much of its content consists of one-sided data, cherry-picked to support a particular point of view.

And that brings me to the most important thing I saw last week: An article in the most recent Baylor Business Review (borrowed from my wife) describes in a profound way this tendency towards distorted reporting:

“Rather than crafting compelling narratives based on carefully sourced data, many communicators conduct ‘narrative-driven data dumping’ in which incomplete and often self-serving messages are bolstered with dubious data.”

That describes a lot of the of information I see in the media, and it describes the vast majority of stories and content I see on the internet. It is a key reason to prefer peer-reviewed academic research. The tradeoff is timeliness; you get more carefully analyzed and presented facts with academic research, but usually with a lag of several months.

One pattern does seem to be legitimate, however, and that is the tendency of stocks to sell off in October during election years, which is contrary to the normal positive performance of stocks overall in the month of October. To test this, we gathered monthly data on S&P 500 returns from Bloomberg going back as far back as we could, which is 1928. We then calculated the average returns for each month, and then we did the same thing for election years only. Sure enough, October is on average a positive month for stocks, but during election years the average returns in October are negative. Average returns for November and December, the two months following, are also positive, regardless of whether it is an election year or not. Interestingly, this pattern is even more pronounced using more recent, post-WWII data – that’s the period the strategists always show, by the way. The simplest explanation for this is that people tend move out of stocks because of the uncertainty surrounding election outcomes, only to move back in once the uncertainty gets resolved. To me, the strongest message here is to not let market fluctuations move you off of your longer-term investment plan, because the volatility surrounding elections is transient, and the sharp see-saw movements we experience in asset values have historically tended to reverse themselves quickly.