Tuesday, November 6, 2012

Elections and Markets: Okay, Rob Arnott isn't ALWAYS Right

Long time readers know we consider Rob Arnott one of the better theoreticians/practitioners* in the biz, and have done so since his days as editor of the Financial Analysts Journal. His work on the equity risk premium, expected future returns and index construction is first rate albeit sometimes disheartening.

From FT Alphaville:
“Is it possible that the market crash is, in part, a direct consequence of the shifting polls that point to a near-certain Obama victory and with it his anti-capitalist agenda?”
John Tamny and Rob Arnott, 30 October 2008
– The S&P 500 since Obama’s inauguration

For all the usual boring and highminded uncertainty is uncertain and you can’t predict the future reasons, we’ve never thought much of the “how elections will influence markets” genre. Too much silly and pointless data-mining, too much short-termism, not enough epistemic humility. And as you can see above, the potential for (certain) people to make fools of themselves is pretty high.

That’s not to say that the identity of the President and the makeup of Congress have no influence on the economy and therefore the markets: they do, or at least they can, especially in the medium- to long-term....MORE
*Here's a nice little paper that über-quant Cliff Asness did with Arnott:
Surprise! Higher Dividends= Higher Earnings Growth

Previously on the Risk Premium Channel:

What Risk Premium Is “Normal”?
A Really Smart Guy On Stocks, Bonds and Expected Returns
"The Real Role of Dividends in Building Wealth" (Clearing Up Muddled Thinking about Dividends)
The Equity Risk Premium: "Using Garbage to Measure Consumption"
Equity Risk Premium: "Why the market’s rate of return—and your nest egg—may never recover"