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Street Smart: Elections and other distractions (for investors)

Ian Ogilvie: The stock market offers investment opportunities even in the midst of worry and uncertainty.
BY IAN OGILVIE Published: November 11, 2012

There's an old saying on Wall Street that “the stock market climbs a wall of worry.” Parsing that short sentence, the worry means the non-personal objections, taken cumulatively, that people have to owning stocks. The idea that all of those objections create a wall suggests that some would-be investors choose not to or can't get over their own objections. But the stock market, which “climbs” the wall, does.

Look around and it's easy to see where all of the “worry” comes from. Some would-be investors point to large-scale problems that seem unfixable, such as the European debt crisis, U.S. fiscal and trade deficits and the U.S. “fiscal cliff” caused by political gridlock in Washington. Others point to things that seem unknowable, such as the effects of the current policies of the Federal Reserve, or the potential problems surrounding electronic trading — think of the “flash crash” of 2010. Still others finger more generic global problems like war, overpopulation, climate change and the like for their reluctance to participate in the stock market, even if they can't explain how these things actually might affect the market.

One of the main culprits that causes this state of worry is likely the 24/7 media of TV, radio and the Web. These media are in the business of finding and disseminating information that people will want to consume. In a competition for eyeballs, alarming stories are a good hook. So when these 24/7 media magnify stories that attract attention, they're arguably just doing their job.

But what's good for the media business may not be good for long-term investors. Numerous studies have shown that the way media present information affects the substantive judgments of people who consume it: anyone polling a few would-be investors who are staying away from the stock market will hear themes that are prominent in the 24/7 media, even though many of those themes aren't predictive or even relevant as to how the stock market is going to perform. Other themes are just predicated on opinion and wrong.

Take for example, the presidential election this past Tuesday. Plenty of prognosticators have claimed that if one candidate won, we'd be in for a bear market. And that if the other candidate won, we'd experience a new bull market. These types of claims are interesting, and they get plenty of media attention.

But media attention does not require much adherence to reality. As Forbes Magazine recently pointed out, the stock market's performance during Barack Obama's first term will likely be the best first-term performance since President Eisenhower's first term in the 1950s. Does that mean that the current president is the most business-friendly since Eisenhower? Definitely not — but even though his term started when the market was unusually depressed, how many people would have predicted the market's success during his tenure? As of last week, the S&P 500 was up about 70 percent during Obama's first term. As Forbes suggests, there is no way to predict whether the market will perform better with the election of one or the other candidate/political party.

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