Special Feature
Barack Obama is running for a second term while Mitt Romney is looking to defeat him and gain his own unique place in history as the 45th U.S. President and its first Mormon. It’s fair to say that the respective policies of each of the candidates are probably the most polar extremes in recent memory with Romney perceived as the champion of the wealthy and advocating tax cutting (be damned the deficit!) while Obama is cementing himself further as the middle class champion. What’s for sure is that whoever succeeds in this race is likely to plot very different respective economic courses. Equity markets are affected by all the important issues that make up economic policy of course — of budget spending, social security policy, tax policy, and a myriad of other possible issues. In this feature, we do not look in detail at the politics behind each candidate, but rather investigate how well the stock market does after an election and whether there is a way for us to potentially profit from this. Ben Bernanke
Throughout this period there were 21 elections with the results split 11-10 between Democrats and Republicans. Performance for the S&P 500 index (including dividends) has been positive, averaging 8.24% in the year after an election. However, in looking at the data, we can see that the average return per annum over this period is in fact 11.46%. At face value it seems that the year after an election is an underperformer. What’s also interesting from the data is that the average returns have been skewed by the big outliers of the Bush & Clinton eras, when exceptional returns were produced as part of the long bull market in stocks that began in the early 80’s. On the downside, we can see that the major underperformers, not unsurprisingly, coincided with the depression era under Roosevelt’s watch. Perhaps there are parallels with now? US stocks are still very highly valued, in complete contrast with parts of Europe and Japan & China — again, powerful testimony to the impact that Quantitative Easing is having on the US markets in particular.
Typically in the 12 months leading up to an election, the incumbent President will try hard to pave the way to be re-elected — in the most capitalist society on earth this means one thing — priming the economy. It’s probably fair to say that Obama has Mr Bernanke at the top of his Christmas card list through his money printing actions. This year the US stock market has stuck to the script and, at the time of writing, has in fact led major global markets in rising by almost 12%. But what happens after the election? Will the market continue its ascent towards its all time highs? Is there any difference between a Republican and a Democratic candidate in terms of market performance?
Digging into the data In order to evaluate the effects of a Presidential election on market performance, we have collected extensive S&P data from 1928.
38 | www.financial-spread-betting.com | November 2012