Can You Predict Post-Election Winners?

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 post-election. For example, the election sector 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.

This article originally appeared in Above the Fray, a weekly newsletter for Dimensional clients. It is republished here with permission of Dimensional Fund Advisors LP. No further republication or redistribution is permitted without the consent of Dimensional Fund Advisors LP.

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