While President Trump’s upset electoral victory two years was a boon for Republicans who supported the president’s “American First” agenda, it sent many Democrats into paroxysms of outrage. And while Democrats have filtered every major policy achievement of the Trump age through a lens of cynicism, Republicans chose a more optimistic tack.
And as it turns out, Republican voters have benefited from that outlook, not just emotionally, but financially as well.
To wit, a paper published by researchers at the MIT Sloan School of Business summarized by Bloomberg revealed that Republicans upped their exposure to US stocks after Trump’s victory, while Democrats poured their money into bonds. This has led to a cavernous gap in returns, as Republicans have reaped the rewards of the Trump economic and market boom, while Democrats have been largely left behind.
According to the paper, following the 2016 election, Democratic voters reported feeling much more pessimistic about the state of the economy, while Republicans reported feeling more optimistic. This divergence in worldviews, according to the study’s authors, supports the rational-expectations theory of asset pricing, i.e. that trading activity arises as different groups of investors embrace divergent theories of how publicly available information will impact markets.
Prior to the election, differences in Republicans’ and Democrats’ portfolios were relatively minor. But after the vote, some of the changes in investing strategy could be attributed to hedging needs that arose as Republican voters tended to be employed in industries that would be positively impacted by Trump’s presidency, while Democratic voters tended to live in industries that might be negatively impacted. But after controlling for these factors, the researchers were able to show that differences in investment strategies after the election arose from biases inherent to the different groups, such as their outlook for the global economy.
Compared with Democrats, Republican investors actively increase the share of equity and market beta of their portfolios. Meanwhile Democrats increased their exposure to bonds and other “safe” investments.
Since the vote, the S&P 500 has returned more than 40%, while the PIMCO Total Return Fund, by comparison, has returned a paltry 1.6%.
But please, tell us again about how Trump’s victory would drive American to an inevitable economic meltdown.
Read the paper below:
Belief Disagreement and Portfolio Choice by Zerohedge on Scribd
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