How Will The Presidential Election Affect the U.S. Stock Market?

Ken Fisher is a billionaire money manager who writes a column for Forbes magazine.

He recently had a column in which he wrote that a lot of investors are worried about how an Obama presidency might affect their stock portfolios.

His answer, which he backed up through analysis of historical data, is very enlightening, because it shows an example of how the markets can react 180 degrees from conventional wisdom, and illustrates why Fisher (like me) is a contrarian investor.

The conventional wisdom is that, since democrats are anti-business, a democratic president will cause the stock market to go down. On the other hand, a republican president will be pro-business and cause the stock market to go up.

Fisher says that actually the opposite happens. Based on historical analysis, a democratic win in the presidential election results in a bullish stock market. The stock market usually performs better during the inaugural years of a democratic president, than a republican president.

Why does this pattern happen?

Because of the principle that is a key to contrarian trading - reversion to the mean.

The markets expect the worst when a democrat is elected president. Then, they are pleasantly surprised after his administration takes office.

On the other hand, the markets expect the best when a republican gets elected president, and then get disillusioned with his administration after he takes office.