Presidential Elections and STOCK MARKETS

Money Report

Visions of donkeys and elephants dance in our heads.

In a few days we’ll know our next president. Pundits are hard at work examining the twists and turns of the final days of this election season, ferreting out the clues that will help craft successful investment strategies for the years ahead.

Who will be better for the stock market and the economic recovery, McCain or Obama?

There are a lot of statistics out there on election results and market returns — some meaningful, some less so — most of dubious value to long-term investors. Each administration inherits a unique set of domestic economic and global circumstances; where you start from determines to a great extent how the markets and economy will perform.

Also, from a practical standpoint the great structural changes in our economy over the last century make conclusions drawn from statistical comparisons with the past somewhat strained.

What data and statistics we do have, we tend to fashion into patterns after the fact, discovering relationships where none exist, seeing shapes of elephants and donkeys in the billowing clouds. It’s all too easy to mistake correlations for causation.

That said, the impact of presidential elections on the market is certainly significant, and there are some worthwhile observations that we can draw from past election years and stock markets that can provide valuable perspective.

First of all, the optimists have the weight of history on their side. Election years, at least since 1939, have been pretty good times to be in the market. In fact, since 1939, the Dow has never posted a loss during an election year, although we may break that streak this year. The best election year performance was back in 1928 when Herbert Hoover swept into office; the market shot up 48.2 percent. The worst, in 1920 when Warren G. Harding was elected, saw the averages fall 32.9 percent.

The first six months of election years have, on average, returned less than 3 percent; the biggest gains have been concentrated in the latter half of the year. It doesn’t seem to matter which party wins.

From 1900 through the 2004 election, the markets in the last half of election years averaged a 17.4 percent gain when Republicans won; when Democrats prevailed, the markets averaged a gain of 15.7 percent.

Looking at a slightly different time span prior to 2004, between the end of conventions and Election Day, the market has posted a median rise of 3.7 percent.

However, the numbers diverge when you consider whether incumbent or challenger won. When the incumbent won, the market averaged a 7.5 percent return. When the challenger won, the market on average lost 1.4 percent.

Financial markets hate uncertainty, and a new administration will typically make changes in tax, fiscal and monetary policies that have unknown consequences for investors. Markets also tend to do worst during the first two years of any presidential term; a newly elected administration is anxious to get the unpleasant taxing and spending decisions out of the way as early as possible, allowing them time to rebuild positive momentum for the next election cycle.

Tightly contested elections seem to have their own dynamic. We looked at market performance during the last half of the year of some very close races. The Dow gained 4.8 percent in this time span in 1944, when Roosevelt beat Dewey. In 1960, when Kennedy beat Nixon, the Dow advanced 5.19 percent. When Humphrey lost to Nixon in a close election in 1968, the Dow gained over 7 percent. More recently, in the final half of the year of the contested election of 2000, the Dow gained 3.4 percent. It’s somewhat comforting to know that a hard fought campaign isn’t necessarily a bad thing for stocks, no matter who prevails.

Which candidate will be better for stocks this time? Well, although the Republican Party is sometimes considered the party of business, the business of the stock market has been a bit better under the Democrats. A recent study from the Journal of Finance found equity premiums were higher during Democratic administrations by about 9 percent, using market-cap-weighted numbers.

Interesting as the numbers may be, election results are probably of limited value in projecting market return. Anyway, the well-known barometers of stock market performance based upon Super Bowl winners and the length of women’s skirts, while just as unreliable, are a lot more fun.

Steven Weber is a Registered Investment Advisor and Director of Investments for the Bedminster Group, providing investment, estate and financial planning and brokerage services, with offices in Bluffton. The information contained herein was obtained from sources considered reliable. Their accuracy cannot be guaranteed. The opinions expressed are solely those of the author and do not necessarily reflect those from any other source. All prices are as of October 2008 and are meant for illustration purposes only.