At the time of the interview, the Standard & Poors stock index was up about 13 percent year-to-date. Although you’d never know it by reading the political headlines, it has been a good year for stocks, especially in the United States.
One interesting election year statistic that I’ve seen is that in years since 1904, nearly every year that the market has been up 8 percent or more, the incumbent candidate has won re-election.
There are three exceptions to this rule of thumb. The first exception was in 1912 when Theodore Roosevelt ran on the Progressive (“Bull Moose”) Party ticket, splitting the Republican vote and enabling Woodrow Wilson’s election victory. President Taft, the Republican incumbent, came in third. Roosevelt’s challenge to Taft solidified Wilson’s victory. His unusual third-party candidacy turned the tables enough that normal rules of thumb didn't matter. In 2012, the Republicans avoided a similar fate when Ron Paul decided not to run as a third party candidate.
The second exception occurred in 1976 when Jimmy Carter defeated Gerald Ford. Although an incumbent, President Ford had been appointed rather than elected and the election came only two years after the 1974 watershed election when “throw the bum out” resulted in the largest number of incumbents thrown out of office since the French Revolution. (OK, that statement might need some more fact-checking.) President Ford paid a political price for pardoning Richard Nixon, resulting in Jimmy Carter’s election and, once again, defying the simple election rule that incumbents win re-election during years when the stock market is on the rise. Although he lost, Ford carried 27 out of 50 states, the most ever won by a losing candidate.
Four years later, in 1980, Ronald Reagan beat President Carter in an electoral college landslide in spite of election polls that heavily favored President Carter. Not since Truman beat Dewey has the polling been so wrong in the presidential race. In 1980, you also had a third party candidacy by John Andrews impacting the race, with the Republican Senator from Illinois siphoning off large numbers of independent votes. Still, as a former Republican, you would think that Anderson was probably splitting republican votes, rather than denying President Carter his re-election. In any case, the market seemed to accurately forecast Carter’s loss, even if the polls didn’t. The market started to rally in March and never really stopped as investors celebrated the end to what many Republicans viewed as an anti-business administration.
For Republicans, 1980 is the model year for the 2012 market/election cycle. Is the current market rally predicting regime change, or validating the Obama recovery?
Typically, markets rally briefly in the spring of an election year, drop back to even in mid-summer, and then rally into year-end as the parties pick their candidates and uncertainty diminishes. Then again, typically, incumbents win re-election, having spent four years using our money to purchase their victory.
During years when incumbents lost, however, typically the market remains flat after the June trough. Unless we’re in sort of a 1980 market/election cycle, the current rally would not be considered good news for Republicans.
During my television interview, this is where I ran out of time. Meaghan Wallace did a great job trying to lead me through the interview, but I just flat out ran out of time.
And so, as Paul Harvey used to say, this is the rest of the story.
As near as I can tell, this market rally is not predicting anything. The polls suggest that this election is a toss-up. The structure of the electoral college, with so many states virtually locked up for one party or another, also forecasts a tight race.
However, the election might be indicating something positive for the market.
In the event President Obama wins re-election, as incumbents typically do, the market’s typical election year pattern suggests that prices between now and November can continue to rally through election day as uncertainty recedes.
In the event Mitt Romney unseats the President, a la 1980’s election year storyline, the markets could rally as investors look forward to what Republicans hope to achieve – a kinder and gentler business and investment environment.
In either case, the markets could remain in rally mode between now and the November election.
Many investors in Western Colorado have voiced to me concerns about the investment environment should the President win re-election. Western Colorado is, after all, a pretty conservative part of the world. As I think about it, though, how many investors are sitting around thinking, “I’ll sell every stock I know, if Barack Obama is re-elected.” For the most part, those inclined to sell everything for political reasons, have probably already done so. They’re not waiting until election day. They’re already out.
So even if the President is re-elected, I don’t look for an immediate sell-off in the market. If anything, the President’s re-election would likely have very little market impact. On the other hand, if Mitt Romney wins, there are a lot of investors, I’m told, which would be much more comfortable investing the trillions of dollars that are sitting on the sidelines, given the likelihood of a more friendly business environment. There is potential for a market rally, in that event.
Unless the rally has already happened – between now and election day.
It is this more bullish message that I’d hoped to convey during the noon news segment. Instead, all I delivered was a brief history lesson that seemed to point leaders to the conclusion that I thought President Obama was destined to win re-election, which really wasn’t my point at all.
I really admire politicians and media personalities who are able to convey their message in the brief window of time that television allows. This week’s interview was yet more evidence that I have a lot of improving to do in the TV interview department. Trying not to convey my biases, I failed to deliver the core message. That’s why I like blogging, I suppose. I can script and edit and nerves don’t get in the way. I’m glad I don’t have to make my living by going on camera every day. Everyone would regret it!
In a blog post, I can take the time necessary to get my point across, and give more thought to the way in which these election year thoughts are presented. Which is better? You decide.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .
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