Many articles appear before elections assessing what impact the election of a particular president may have on the market. “But too often the authors seem to have forgotten that for legislation to take effect, it requires not just a presidential signature but passage by both Congressional chambers,” writes Mark W. Riepe, CFA, senior vice president of Schwab Center for Investment Research.
To gain a better understanding of the impact of a presidential and Congressional election on markets, Riepe studied administrations going back to 1953, starting with Eisenhower. He classified each succeeding year as either a non-gridlock year, in which a single party controlled both Congressional chambers and the White House, and gridlock years where control was split in some fashion (32 were gridlock, 19 non-gridlock).
At first blush, it appears that the gridlock years are good for investors. During those 32 years, the average stock market return was 14.08 percent. When a single party controlled everything, average returns slipped to 10.67 percent. But Riepe immediately cautions that the problem with drawing inferences from this is that there are just too few years to allow for something as volatile as the stock market. In fact, during one lengthy stretch (1953–1992), the market actually did better during the non-gridlock years.
Does this mean politics have no bearing on the markets? The problem with assessing their impact is that there are so many complicating factors, according to Riepe. For example, the market also is influenced by such things as Fed policy, geopolitical turmoil, and stages of the economy. There’s also more political “fuzziness” between parties than investors often realize, says Riepe, further clouding investment forecasts.
If there is a place for investors to put a political spin into their portfolios, it lies in market sectors that might be directly affected by legislation and regulation depending on who’s running the show, says Riepe. He believes a Kerry win might benefit generic drug stocks, alternative energy, and homeland security companies and hurt brand-name pharmaceuticals and traditional energy companies. A Bush re-election might help defense contractors and traditional energy firms and hurt healthcare stocks, Freddie Mac, and Fannie Mae.
But don’t wait until after the election to make your choices, cautions Riepe. “The market takes into account any party effect that may exist. Most elections aren’t surprises. As the picture becomes clearer as to who will control what branch of government, prices adjust ahead of the actual election.”
[Source: The Financial Planning Association]
