US election – What will it do to your portfolio?

13th January 2012

The Telegraph quotes stock market historian David Schwartz:"The S&P 500, a broadly based index of US shares, has fallen in only three presidential election years since 1952. The index fell by about 3pc in 1960, when John F Kennedy was elected, by 10pc in 2000, when George W Bush was voted into office, and by 38pc in 2008, when Lehman Brothers collapsed and Barack Obama won. In the other 12 election years over the period, the S&P his risen, seven times by double-digit percentages."

On average, the S&P has seen greater rises when Republicans have been elected. As President Obama still looks to be the favourite, this may argue against a significant rise this year. Simon Ward from Henderson and Mindful Money blogger says: "the 2012 election is unusually important for the economy, with Obama running on an anti-business, "tax the rich" platform that is likely to discourage investment and hiring, at least while he remains the frontrunner. Markets, therefore, may fluctuate inversely with his poll ratings." But the US has the advantage of some economic momentum as well in 2012. For example, manufacturing activity expanded at its fastest pace in six months in December and construction spending jumped from the previous month. 

Mr Schwartz concluded: "I think the US market will rise this year. What's intriguing about America at the moment is that the economy is really coming alive. Last year it was like a spring being pulled tighter and tighter – now the market is ready to rebound. The election will also play a part."

Fisher Investments goes one step further, with a full ‘infographic' detailing the impact of an election year on individual portfolios. He also provides some sound theory behind the market movements: "Presidents typically lose relative power at mid-term elections. They know this, and push for more major legislation in the front half when their power is likely to be greater. You can see this in history-more material legislation has passed in the front half of presidential terms, rather than the back.

"New legislation typically results in redistribution of money or property rights, or regulatory changes. Research shows people hate losses much more than they like gains, so when the likelihood of legislation is higher, overall risk aversion rises."

The influence of the election on markets is not, however, universally accepted: "This is all nice election-year theory. The problem is that it's just not true. In looking at a study of all 23 election years since 1920, just 15 were positive, or 67.6 percent. However, ignoring whether or not they were elections years, over those 91 years, 62 years were positive anyway, or 68 percent. It seems a fair conclusion that the market was up in 68 percent of years overall and 67 percent in election years. Whether it was an election year or not seemed to have had no effect on the market's performance. Whatever happened was likely to have happened anyway."

Whether stock market performance in election years is causal or accidental, the election itself is likely to have other long-term implications, as discussed here by Philip Coggan

"The election might well force both candidates to the extremes. The tea party wing of the Republicans is very fiscally conservative and is deeply suspicious of the Federal Reserve. Mr Perry referred to potential Fed actions as "almost treasonous" while Mr Paul wants to abolish the Fed altogether. The Republicans almost brought the government to a halt in the battle over the debt ceiling last summer.

"Again, equity markets will be nervous about what such rhetoric may mean in terms of higher taxes or more regulation." Coggan concludes that this could be an election in which the markets suffer whichever candidate wins.

However, he is in a minority. The majority of stock market pundits believe that the US election could provide a tailwind for markets in 2012, particularly when combined with increasingly strong economic growth. Let battle commence.


More from Mindful Money:

Does political climate effect your investment strategy?

Generational shift: Changing investment habits

UK investors pull out of equities – but should they be fearful?

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