It’s a simple question: “Will the stock market do better under Romney or Obama?”
It was small talk when Jane, a 50-something woman I have known for years, asked it when we bumped into each other at the town dump, but my answer was anything but a throw-away, and nothing that she – or any other political partisan from either party – wants to believe.
It doesn’t matter.
Before you blast into some sort of rage – assuming you are a fan of either candidate – understand that the question is a very specific one. Whoever wins in November will go a long way toward shaping the country’s economic future, addressing issues like the impending fiscal crisis, health care and much more. Their policies will be crucial and are worth arguing; their effect on the direction of the stock market, not so much.
People want to believe certain things about market behavior, most notably that their party is the one that drives the market better.
It’s not true.
You can play with numbers and time frames and time horizons to make a case, but drop the gamesmanship and look for historical proof that the market performs better or worse depending on which party controls the White House, and you won’t find it.
Believe that the markets do better under a divided government – a concept that has been popularized since the pre-Internet bubble days of the early 1990s – and the numbers don’t actually back you up.
Look at the first three-and-a-half years of every presidency back to 1970 – removing the final six months of a term simply because that is the time most likely to be affected by politics and the potential for a change in power – and the highest returns for stocks were registered under Democrats (Clinton and Obama), while the highest returns for bonds were under Republicans (Ronald Reagan and the first George Bush).
Ed Baldrige of Baldrige Asset Management in Allentown, Pa. – who did the study just to see if it backed up the assumptions that the president matters to the market – noted that the lowest term return for stocks occurred under Republicans (the second George Bush and Reagan), while the lowest bond returns were under a president from each party (Bush 2, again, and Jimmy Carter).
Mind you, things evened out over time to where the marked edge from the good periods – or shortfall of the bad ones – basically washed out. But the results run contrary to most popular thinking about elections and markets.
For proof that things wash out, consider a recent white paper by Russ Koesterich, chief investment strategist for iShares, who noted that the average return for the Dow Jones Industrial Average dating back to 1900 has been 8.5 percent under Republicans, and around 6 percent under Democrats (not including dividends in either case). “When you adjust those averages for the market’s volatility – the standard deviation of the DJIA’s return has been about 22 percent over the past century – the numbers are statistically the same,” Koesterich said. “The party affiliation of the president had no consistent influence on stock market performance.”
That leaves just enough wiggle room for partisans to break out the important: “This time it’s different.” (It’s worth noting that Koesterich also had numbers showing that the market’s success under a divided government in the 1990s was more anomaly than cause/effect.)
It’s hard to say what the market will do under any given president. There are too many factors; think valuation of the long-term secular trend – something that doesn’t reverse course just because there is change or continuity in the White House. No President of the United States – regardless of the make-up of Congress – can turn around Europe on a dime, or change so many troubling economic elements that the stock market just hits its stride because they take office.
The president will certainly have more impact than a fashion designer who raises or lowers hemlines, a quarterback who throws the winning pass in the Super Bowl or any other bit of investment hogwash, but for all of the feelings that one party means a “better market,” the truth is that better underlying conditions typically have a massive effect, where the party affiliation of the president does not.
This brings us back to Jane, who was thinking that if the election of one candidate or the other would play out in a better market for the next four years, it might sway her vote. In an election that is reportedly too close to call, I would imagine there are a lot of others like her, looking for the same edge.
Since it won’t be as easy as “this guy means a better market,” the important consideration for someone like Jane who is seeking market insight would be the biggest policy issues with the most direct ties to stock performance.
In the short run, that means the “fiscal cliff,” tax policy/reform and entitlements.
Clearly, the election will determine who is at the rudder of the ship as those concerns are navigated. Investors from both sides recognize one thing about taxes (they are going up, though the way they will rise and who will pay more is unclear); with a divided Congress and the nation’s political leaders seemingly incapable of compromise, it’s dangerous to even hazard a guess at the most general of outcomes on the other issues.
The policies could lead to another recession, or could lead to a robust recovery. The one thing you can be sure of is that economists from both parties believe their ideas will lead to the good, and the other side’s to the bad.
“The stock market ultimately correlates to earnings and dividends – mostly influenced by a business cycle that is at best difficult to forecast – and the skill of management and workers to create commercial advantage,” said Andrew Morse, managing director for HighTower Advisors in New York. “I am not indifferent about who ought be president – but my political feelings and views nor anyone else’s should enter into the logic sequence of forecasting stock market results.”
In short, don’t let forecasts about market direction affect your vote.Chuck Jaffe is senior columnist for MarketWatch. He can be reached at firstname.lastname@example.org or at P.O. Box 70, Cohasset, MA 02025-0070.