LONDON, 18 October 2004 — With the US election only 16 days away, traders and investors have started to guess the economic prospects under the winning candidate.
Historically, the economy performed better under Democratic presidents than the more pro-business Republicans. As the chart below shows, since 1964, all but one election year posted positive returns for stocks. Of course, past performance is not an indicator of future results.
By assessing the table, investors can see the correlation between the president’s political party and market performance.
A recent study found that, from 1927 through 1999, stock market returns have averaged about 5 percent higher when a Democrat, rather than Republican, is president (with the exception of Ronald Reagan who was elected in 1980 when market returns for an election year were at a 20-year high).
Analysts note a number of factors that may affect stock market performance during election years, but once the election is over, other political factors, or forces, may affect stock market performance.
Depending on how pleased investors are with the outcome, they may be bullish (pushing up the price of stocks) or bearish (bringing down the price of stocks by selling). And once the “new” administration is in control, its policies and initiatives will have a definite impact.
Based on the above, the comment I would make to US investors is this: “If you believe in history repeating itself, Democrat Senator John Kerry might be your man. If you are willing to forgo the existing government liberal spending and huge deficit, the rising energy crisis, high debt levels and a softer jobs market and believe in a recovery, then George W. Bush is your man”.
Traditionally, stock markets have performed well in the run-up to the Election Day.
For this reason, the US government authorities tend to put off difficult decisions that might shake investors’ confidence and cause uncertainty at this juncture in the election campaign.
Generally speaking, the US election is an event that could affect both political and economic realities. Again, a historical fact: Looking back at all US presidential elections since 1900, it is striking to note that the stock market much prefers the incumbent to win.
It is the case of the “devil you know”. Given this scenario, could a Kerry administration be, at least initially, a risk factor for the market?
Currencies are at least as exposed to the US elections as shares. A colleague in New York believes that: “if Kerry were to win the election, then that would be bearish for the dollar, because of the “don’t know” factor. What would Kerry do with Bush’s tax cuts? What would happen to the stock market? Would I buy US dollar now given the volatility ahead of the elections?”
Mr. Investor: Please keep your perspective intact.
Although politics has an important effect on the economy and the performance of the stock market, it is just one piece of a very complex equation.
Business cycles, the global situation, consumer confidence, the introduction of new products and technologies — as well as the success and failure of individual companies and industries — also factor into market cycles. Developing an appropriate asset allocation strategy, staying diversified and keeping a long-term view will help your portfolio weather those cycles, no matter who occupies the White House.
(Habib F. Faris is vice president at Clariden Bank, London.)
