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What Effect will the Election have on the Stock Market?

by Kevin Mercadante

With the election just days away many investors might be anxious in anticipation of an outcome that will give some insight as to where the stock market is heading. A re-election of Barrack Obama might remove the uncertainties that a new president will bring. The election of Mitt Romney, on the other hand, might eliminate some lingering doubts about current administration policies.

Will investors be better off with one candidate or the other? And how important are elections when it comes to the stock market?

The stock market seems to like elections no matter who wins

Will the election effect stock market?

How will the stock market react?

It’s sometimes tempting to assume that the performance of the stock market during an election years holds clues to which party will control the White House. A rising stock market might be an indication that the investment community favors re-election of the incumbent. Or that it supports his replacement with a popular challenger.

In truth, stocks predict neither event in any election year. Closer to the truth is that the stock market likes elections in general! For example, the stock market has had a positive performance in 18 of the past 22 presidential elections going all the way back to 1928. How do we interpret that? Can we interpret that?

Complicating this years election is the fact that recent polls are showing a close outcome to the contest no matter which candidate wins.

The case for Barrack Obama

Barack Obama 2012 Presidential Campaign LogoLove him or hate him, the connection between Barrack Obama and the stock markets looks like a cozy one, and investors might welcome his re-election.

The financial markets seem to like the president. When President Obama took office in January of 2009, the Dow Jones Industrial Average was 7,949. It’s now well above 13,000. That’s an increase of better than 5,000 points, or well over 60%. What ever the president’s opponents claim, it’s clear that that Wall Street finds favor with him.

Continuity in the White House. What ever the administration has done to find favor in the financial markets can only continue if the president is returned to office. While many on Wall Street may like some of Mitt Romney’s declared policies, continuity of leadership should mean more of the same favorable policies that have benefited the market so far. Even if you don’t like all of Barrack Obama’s policies, it’s one of those classic example of “the devil that you know vs. the devil that you don’t know.” The financial markets tend to like continuity in the White House; at a minimum it means less guess work.

The markets don’t like change. Though we often think of the financial markets as being somewhere on the global cutting edge, it’s far closer to the truth that they don’t like change. Under President Obama, we’ve experienced steady flows of monetary liquidity from the Federal Reserve, record low interest rates and steady, if unspectacular, improvement in the economy. Those trends have taken root in corporate and business expectations, and Wall Street tends to prefer that to the unknown of a change in leadership.

The case for Mitt Romney

Mitt Romney 2012 Presidential Campaign LogoIn the months leading up to the election, the economy seems to be sputtering and the stock markets have stalled. Investors might welcome a Mitt Romney presidency.

There isn’t a big difference between the two candidates. If continuity favors Barrack Obama, it could easily be argued that a Mitt Romney presidency probably won’t bring in a radical change in direction. Romney governed a very Democratic state and entered many political compromises that have cost him support from conservatives. He also ushered in the Massachusetts healthcare reform law, sometimes known as “Romneycare”, that has formed the basis of the “Obamacare” health reform law (PPACA) at the national level. If Wall Street is looking for change, without a radical shift in direction, Mitt Romney could well deliver it.

Republicans are more likely to renew Bush-era tax cuts. The country is now facing the “fiscal cliff” of tax increases from the expiration of Bush-era tax cuts. This will include a 2% increase in the Social Security payroll tax and a substantial increase in the long-term capital gains tax rate. Both expire on December 31, 2012, and have substantial capacity to hurt both the economy and the financial markets in particular. The White House has not taken action on these changes, and is demonstrating little interest in doing so. A Mitt Romney administration would be more likely to extent the tax cuts, and the financial markets should cheer that.

“Obamacare” has created a big, fat “X factor” in the future. In another swipe at the continuity factor favoring the president, the oncoming implementation of Obamacare could be an economic and financial game changer. It’s primary provisions won’t take effect until just after the election. It will include a radical overhaul of the healthcare industry—which is currently better than 17% of the US economy—and create a battery of new taxes and fees. This could have a major negative effect on the economy and the financial markets. A Mitt Romney presidency could moderate some of the more damaging provisions.

Oh, and there’s one widely accepted factor that needs to be consigned to the dustbin of history: the financial markets like Republicans. While that did seem to be true up through the 1960’s, the results since have completely discredited the idea. The Dow fell in the first 21 months following the inauguration of Republican presidents in 1968, 1972, 1980 and 2000. It rose in the first 21 months following the election of Democratic presidents in 1992, 1996 and 2008.

Does that mean that Wall Street now prefers Democrats? Don’t bet on it! What it mostly means is once a trend is established, it reverses. It seems Wall Street can never be totally predictable.

In the end, it may not matter who wins

After the election dust settles and Wall Street begins to settle into new patterns, factors beyond politics will probably win the day.

Economic factors. Even more so than presidential elections, the direction of the financial markets are driven more by economic factors. An acceleration of economic growth could result in a rising market, while the prospect of a looming recession could send it spiraling downward. Who ever is sitting in the Oval Office when either event occurs will probably have had less to do with it than anyone wants to believe.

Unexpected events. An energy crisis, a major war or the financial collapse of another country usually have more impact on the direction of stocks than which party controls the White House. No matter who wins on election day, there’s no way to factor these events into the future.

Broader stock market trends will dominate. Earlier I listed a declining stock market following Republican elections from 1968, 1972 and 1980. But here’s something more: the market also fell following the 1976 election of Democrat Jimmy Carter. From the late 1960’s through the early 1980’s, the stock markets were in a long-term bear trend that didn’t favor either party. Sometimes the markets will do what they will, and who the party in the White House is will have little effect on anything.

What effect do you think the election will have on the stock market?

Voting is Patriotic image credit: farlane, Obama campaign, Romney campaign.


Published or updated October 29, 2012.
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{ 4 comments… read them below or add one }

1 Roger @ The Chicago Financial Planner

Nice post. I agree with you that to a large extent it doesn’t matter who wins from an investment point of view. Yes certain stocks might fare better based upon who wins. For my clients I’m not going to make any changes in their portfolios either way. Investing is a long-term exercise and a Presidential election is short-term noise in my opinion.

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2 Kevin Mercadante

Hi Roger–“Short term noise”–that’s FUNNY. But also true! It matters during the honeymoon phase the first few months out, but then the new president runs into the same roadblocks as his predecessor. Then, if the incumbent is re-elected, it’s business as usual. I think you’re giving solid advice.

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3 Jon @ MoneySmartGuides

I think a decent amount of the stock market gain under Obama is due to the Fed stimulating the economy during this time. The average investor is still sitting on the sidelines and when (and if) they decide to get back into the market, it will move even higher.

The rest of the gain under Obama is due to the slow but steady improvement in the economy.

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4 Kevin Mercadante

Hi Jon–I think you’re right. The decline of interest rates is probably the single biggest contributor because fixed income assets can’t compete with equities. The only problem is that once you have near zero interest rates, what do you do for an encore??? I think going forward, economic factors will become more important. That could be a problem no matter how the election turns out.

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