article 11-18-2014

When it comes to elections, is Wall Street the voice of reason?

A recent article in the "Sunday Review" section of The New York Times, penned by political scientists David M. Primo and Trung A. Dang, caught my attention. It began with an interesting, not to say provocative, question: "How much do investors care about election outcomes?"

The piece went on to suggest that we as investors would seem to care very much if the rally that took place on the Wednesday following the 2014 midterms could be used as evidence. The major equity indexes all rose that day, indicating—perhaps—that the so-called "investor class" was pleased with the Congressional and other gains made by Republicans the previous evening.

The article then went on, however, to offer a series of cautionary notes about reading too much into Wall Street's reactions to elections. The authors point to various studies which indicate that investors tend to care most when elections seem to promise major policy shifts. Otherwise, Wall Street greets political shifts mostly with a shrug.

This leads the article to what we think is an astute conclusion: "Markets are often accused of overreaction, but in the case of elections, investors may in fact be the voice of calm and reason. And that may be the biggest surprise of all."

As bottom-up stock pickers, we pay our closest attention to what we know best—the fundamentals of a company and its industry. We certainly keep pace with what's happening in politics, the economy, and the wider culture, but our experience has taught us that the bulk of these developments are not likely to make a significant impact on the long-term well-being of a business.

There are exceptions, of course, but by and large we do our best to tune out those events that might cause a brief ripple in stock prices but have little long-term effect on a company's fortunes. We have worked hard to hone this sense of what matters most to businesses over more than 40 years of investing.

Our long-term investment horizon is something we see as a real advantage in that it fosters a perspective, shared by each member of our investment staff, that is distinctly company-centric. It allows all of us to keep our collective focus where it belongs—on the companies.

Important Disclosure Information

Chuck Royce is Chief Executive Officer and a Portfolio Manager of Royce & Associates, LLC, investment adviser to The Royce Funds. Mr. Royce's thoughts and opinions in this piece are solely his own and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

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