The Republican supporters think it looks like a dead heat finish between Mitt Romney and Barack Obama, but the consensus of polls really point to an Obama win, though as the old cliché goes “this is too close to call”.
Of course, we care about this election in terms of how it will affect our investments, so what would be the best result for us?
Stimulus addiction
This question comes just as a weird Wall Street reaction happened over the weekend with a better-than-expected jobs report – 171,000 new jobs in October rather than the expected 125,000 – and the Dow gave up 139 points or 1.05%! Why? Well the simplest answer is that if the US economy is improving quicker than expected, then stimulus through quantitative easing, or ‘QE Forever’ as some have called it, could see the pin pulled on it.
History actually shows that despite the fact the Republicans are the party of choice for Wall Street, the Democrats are better for stocks, maybe because they are bigger spenders. However, there has been work to show that this belief about the Democrats is exaggerated when adjusted for market volatility.
I argue it actually gets down to the policies of the new administration and while Obama may worry some Wall Street big players, his spending programs and his support for US Fed boss Ben Bernanke would be better for stocks. Tax, health and other regulatory changes could have a big impact on stocks and investment.
On the other hand, a Mitt Romney win would be good for negotiating the fiscal cliff issue because the Republicans are bound to win the House of Representatives. If they surprisingly win the Senate as well, then the fiscal cliff issue would be settled quickly, which would be good for the stock market. But there are too many “ifs and buts” in that analysis.
History lesson
Ned Davis Research looked at over 100 years of elections and stock market data and found if the incumbent won the election, it was better for stocks. Stock results averaged a 15.1% return on the Dow Jones if the incumbent won, but a -4.4% if he lost.
On a party basis, the result was stronger for a Republican incumbent, but that’s irrelevant for us with a Democrat in power.
Forbes adds more curry to the story pointing out that the stock market likes a Democrat president and Republican Congress, which looks likely if the recent polls can be believed. Forbes says the average return is 21.3% on the S&P 500 index if you get that unholy mix, but only 4.5% when it is flipped on its head.
The bottom line
From my point of view, the fiscal cliff negotiations are the big short-term issue. It will be resolved, but the markets will be under pressure until it is. A Romney win would be good for stocks short-term, but if history is any guide, an Obama win would be better for stocks next year. After that, it will depend on whether the President has the guts to reel in the deficit.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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