presidential election strategies

[8/17/12] But it's worth asking how changing investing strategies because of a presidential election has worked in the past.

We have plenty of examples.

During the 1996 election, market commentators recommended following a time-tested trend. "Investors would be wise to adjust their portfolios, depending on who wins the presidency in November," The News Tribune wrote that year. It continued:

Studies have shown that small stocks usually fare better under Democratic administrations and bigger stocks fare better under the Republicans. Research by Tacoma's Frank Russell Co. and Liberty Financial Cos. of Boston has drawn the same conclusion. So, the message is clear: If Bill Clinton wins, think small; if Bob Dole wins, think big.

How'd it work? In the four years following President Clinton's win, small-cap stocks underperformed large caps by more than half. In the succeeding eight years of Republican President George W. Bush's time in office, small-cap stocks outperformed by a factor of two. Anyone following the advisors' strategy would have dramatically underperformed a broad index for more than a decade -- and that's before trading fees.

It gets worse from there.

During the 2000 presidential election, Newsweek wrote that a win by George W. Bush and the ensuing tax changes could "help banks, brokers and other investment firms." By the end of Bush's second term, the KBW Bank Index had dropped almost 80%.

Another analyst from The Money Channel gave a bullish endorsement of airline stocks if Bush won the election, noting that "a broad tax cut ... has the tendency to increase discretionary spending." By 2005, four of the six largest U.S. airlines were in bankruptcy.

"There's an [easy] way to put your money on the November contest: buy some stocks," another Newsweek article counseled before the 2000 election. "The U.S. stock market hasn't lost money in a presidential-election year since 1940." But then it did in two of the next three election years.

Analysts lined up in 2008 to offer their recommendations before election day. Mad Money's Jim Cramer wrote: "An Obama victory would also be good for solar and wind power. My No. 1 solar pick would be First Solar [ (Nasdaq: FSLR  ) ], the only company in the field with a product that's commercially viable." The bulk of solar stocks have since collapsed, with First Solar down 93%.

If Obama won, Cramer went on to caution, "because of all the negative rhetoric, you'd have to trim both the major oils, like ExxonMobil [ (NYSE: XOM) ] and Chevron [ (NYSE: CVX) ], and the big drillers, like Schlumberger [ (NYSE: SLB) ] and Transocean [ (NYSE: RIG) ]." A basket of the four has gained more than 60% since Obama took office.

He wasn't alone. The idea that an Obama presidency would be a boon to green energy and a strike to big oil was nearly universal. Reality, as it has a tendency of doing, has proven quite the opposite.
Jimmy Carter warned in 1980 that Ronald Regan's tax policies would hurt the economy. Instead, it boomed.

Ronald Reagan warned in 1993 that Bill Clinton's tax policies would hurt the economy. Instead, it boomed.

You can go on and on. When it comes to presidential elections and your investments, there's only one constant: Those who make specific predictions about the effects of policy tend to lose.

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[11/6/12] You're going to see more versions of "If X wins the election tomorrow, here's what stocks will do" over the next 24 hours than you can shake a stick at.

Try as hard as you can to ignore it all. History makes one thing clear: There is little correlation between elections and stock performance -- particularly in the short run.