People argue about policy, personality and party, but markets look forward and anticipate what might happen in the future. While Washington is slow, markets operate in real time, just like traders do. Let us cut through the political noise and focus instead on what really matters and the investment decisions that follow.

S&P 500 Annual Returns

Who is better for the market Republicans or Democrats? So, take a look at the data and see if there is any, the investors and traders could use from the two competing perspectives. The average annual return without including dividends for the S&P 500 has been about 3.9% with a Republican in the Oval office. When a Democrat was in the oval office, the average return was about 12.8%. That seems like the S&P loves Democrats. Does this in anyway suggest that we should buy stocks when a Democrat is in office? Let us explore further by asking the question why the S&P 500 have higher annual return when a Democrat is in office. The markets have seen pretty big drops over the last 35 years. After the 1987 crash, the S&P 500 rallied to end 1987 slightly higher. The year 2008 saw another big crash in the last quarter of the year — the final months of a Republican presidency. One can argue that the Republican president was partly to blame for the crisis. Politics aside, to be fair, nobody could have predicted that the crash was coming with any certainty. Had the crash happened few month later when Democrats were running things, the average returns under a Democrat would have dropped dramatically.

Market Volatility

Historic market volatility, or the standard deviation, is characterized by how spread apart the prices are for a series of annual returns. For the S&P 500 annual returns since 1981, the standard deviation is over 18% for the Republicans and 12% for the Democrats. Does it mean the Democrats cause less volatility? Not so fast. Again, the difference is, standard deviation would largely disappear for the Republicans if the 2008 catastrophic event happened a few months later. 2008 crash happened when it did. You cannot change history. But be careful about assuming that under a Democratic president, the S&P 500 will have an annual return four time higher and with a lower volatility than under a Republican administration.

Growth

The S&P 500 grew by a factor of 271 from 1981 to 2015 not including dividends. It grew 185 times when a Democrat was in power. So if you had invested only when a Democrat was in power based on favorable market volatility and annual returns, you would have missed on over 30% of the S&P 500’s growth. We could run this sort of analysis over a longer time frame and also factor in which party controls congress, or any other interesting variable such as interest rates for that matter. Do not ever forget that whatever happened in the past is no indication of what could happen in the future.

GDP

The party that takes the white house isn’t necessarily a great market indicator. US gross domestic product is a primary gauge of economic growth. Between 1981 and 2015, the US GDP has grown about 5.31% annually. When the Republican was president during that period, the GDP grew on average 5.87% annually. When the Democrat was president, it grew on average about 4.57% annually. Aha! So Republicans are better for the US economy, right? Again, think again.

It is true that over the past 35 years, Republican administrations have seen higher GDP, but it has seen some big swings year to year. The standard deviation is a measure of those swings. The GDP growth’s standard deviation for the Republicans was 2.75%. For the Democrats, it was only 0.75%. This means GDP growth was more volatile and less predictable under the Republican administration.

Like S&P 500, different time periods for GDP can yield different results. Also, FED policy during those time could have been a bigger factor than the presidency. So, it doesn’t matter who sleeps in the White house, predicting the GDP growth based on that is only as good as or as bad as predicting the S&P 500’s growth based on presidency.

Implied Volatility

Bullish or bearish stance based on the outcome of the presidential election may not be a good strategy. Earnings, interest rates, oil prices, the performance of the dollar, new technology and so on have direct influences that can drive stock prices higher or lower. Congress can have a greater influence too. But even here, the market might not interpret the laws and regulations as do the investors predict. So if the presidents and the political parties do not matter what do the investors pay attention to?

The market cares about the perceived uncertainty surrounding things like, economic data, the Fed and earnings. That uncertainty gets expressed in the markets as “implied volatility.” So, if the market expects a particular administration to cause a lot of future uncertainty, implied volatility will likely rise. If the market expects the administration to “stay the course” without any surprises, implied volatility will likely drop. It is always better to consider the implied volatility, which is the cue from the market itself, rather than from Washington. So the slogan for the investors and traders alike is “It’s the implied volatility stupid!”

Be Practical

Keeping an eye on Washington also helps. Is Congress going to vote on new regulations on fracking? Then take a look at the implied volatility and prices of the stocks that have exposure to natural gas. That could be a potential trade opportunity. How about a trade deal that increases technology exports? Take a look at the implied volatility for the tech stocks. If the implied volatility is high, trade short (sell) option strategies such as covered calls, cash-secured puts, short iron condors and short call verticals. If on the other hand, the implied volatility is low, set trade using long (buy) option strategies. Why? Because the premiums will be low.

Bottom Line

When it comes to investing, politicians have less impact on the market than they think they do. Therefore, it is less important to worry about which party will prevail, and more important to keep an eye on the market itself. It is up to you, not the slug-fest unfolding in our nation’s capital Washington, to make informed trading decisions based on volatility and growth. Savvy traders and investors don’t care about predictions — just results.

Courtesy: How to Trade Presidents? by Mark Ambrose, Think Money, Fall 2016 edition.