With primary season upon us, investor attention is beginning to turn to the upcoming U.S. election. More than in previous cycles, several factors make the outcome difficult to predict. The Republican presidential nomination race is wide open, with no clear front-runner and with many voters who remain undecided. The turnout for the presidential election will also impact the outcome for "down ballot" races in the House and Senate. While the House of Representatives is likely to remain in Republican control, control of the Senate could be in play, given the greater number of seats that the Republicans need to defend.

For investors, the key question is, will any of this make a difference for markets? As we first discussed four years ago, while many investors connect political alignment with equity market returns, very few of these patterns hold up to scrutiny. Historically, whether a Republican or Democrat occupies the White House has had no statistically significant impact on U.S. equity markets. Another bit of myth that does not survive close inspection: markets do better under divided government. Interestingly, one political condition that does seem to matter for equity markets is the year within the election cycle. There is some evidence that markets generally perform worst during the first year of an administration and best during the third year. For investors looking ahead to 2016, historical patterns don’t suggest either a positive or negative bias.

However, while the political identity or composition of government may not be particularly relevant for the broader U.S. equity markets, investors are not wrong to focus on the election. Elections do have consequences for investors, since the direction of policy will be fundamentally affected by the voters' choices. Although certain initiatives, such as corporate tax reform, are likely regardless of the next administration, other policy priorities are very much path dependent on whom is elected. Under a Republican administration, which is likely to coincide with a Republican Congress, individual tax relief and support for trade deals are more likely.

Should the Democrats win, presumably under Hillary Clinton, corporate tax reform is still likely but individual reform, while still possible, would arguably involve a more complex "grand bargain" tied to corporate relief, particularly as the House and potentially the Senate would remain in Republican hands. However, a Clinton administration would likely be willing and able to embrace immigration reform and make modest adjustments to the Affordable Care Act (ACA). Another area where the outcome will matter is the Federal Reserve (Fed). A Republican administration is likely to result in a marginally more hawkish Fed.

The election will also have an important impact on the leadership at key financial regulatory agencies, especially the SEC and the CFTC, along with the Department of Labor, which is increasingly active in regulating retirement products.

Unfortunately, one issue is likely to remain untouched regardless of who wins: Neither party is demonstrating much appetite for long-term entitlement reform.

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