When you cast your ballot on Tuesday (and hopefully you ARE casting your ballot), should you be thinking about your investment portfolio?   Everyone that has issued a prediction on the results of Tuesday’s election has said that it will be a strong day for the Republicans.  They only differ on how many House seats will change hands and on whether it will be enough of a tidal wave for the Republicans to take back control of the Senate.

So, what about your investment portfolio?  Republicans are generally thought to be the more pro-business party.  Does that mean that if the Democrats lose their majority it will be good for business, and therefore stocks?  At least one major prognosticator thinks so.  Birinyi Associates, Inc. says that if Barack Obama’s party should lose control of the Senate, US stocks would probably rally through February. 

This is another case of trying to find patterns in historical data and then applying those patterns to today’s markets.  They found some interesting, though not particularly helpful, patterns of stock performance around elections.  For example, the six times that the Senate changed hands during elections in the middle of a president’s terms, stocks posted an average three-month gain of 5.2%, and only fell once, when the Democrats lost the Senate in 2002.  This is data mining gone wild! 

The analysts who created the report for Birinyi are pretty smart guys.  But, I think they wasted their time.  Instead of using current economic data and trying to predict how a Republican victory might affect industries, revenues, earnings, etc. (which I also think is folly), they spent their time looking at historical data when making their conclusion that “Democrats Losing Senate Would Probably Give Boost to S&P 500.”   

The authors even commented that they took a “special interest in 1946 and 1994 midterm elections, when first-term Presidents Truman and Clinton lost control of the Senate and House.”  In both of those cases, the market was down in the two months prior to the election, and moved higher over the three months following the election.  To their credit, they probably couldn’t have found a better example…two first term presidents losing control of Congress.  But how useful is the information?  Leading up to Tuesday’s election the S&P 500 is coming off a very nice two-month rally.  September saw a 5.6% gain for the S&P 500, while October followed with a 3.6% gain.  So, should we assume since it’s the opposite of the example the analysts used, we should expect a selloff if Obama loses both the House and Senate?

Or, maybe this is simply another case of “buy the rumor, sell the news?”  We see this all the time with earnings announcements and other big events in the markets.  Maybe “those in the know” are fairly certain of the election outcome and stocks have been bid up in advance of the actual event.  If that’s the case, then we’ll probably see a selloff. 

In either case, are you willing to bet your portfolio on the election outcome?  Once again, it’s just noise.  You shouldn’t listen to any of it.  Two similar events over the last 100+ years do not a pattern make.  Neither do six.  They are only a pattern because someone is looking for one.  The proper thing to do with your investment portfolio is to tune out market prognosticators.  The election will come and go and, in the short term, the markets may go up, or they may go down.  Stay focused on the long-term, make sure you are properly diversified, and rebalance your holdings when market movements create an imbalance.

Now, please go cast your ballot.