September 19, 2008
Historical evidence weaves a tale of courtship between the stock market and presidential elections – where the former responds to the rhythm of the latter – but in an economy plagued by the subprime fallout, Wall Street might buck the trend.
The year prior to a presidential election normally courts a bull market. In the first six months of 2008, however, the markets suffered a loss greater than any presidential election year since 1940, according to data culled by InvesTech Research, a Montana-based financial research firm.
The more recent implosion of the financial sector, including the Lehman Brothers’ bankruptcy, collapse of Bear Stearns, government bailout of Fannie Mae and Freddie Mac, and federal rescue of insurance giant AIG, exacerbated that already instable market; the Dow Jones Industrial Average plummeted 504 points on Sept. 15 – the biggest one-day drop since the markets re-opened six days after the terrorist attacks of Sept. 11.
The Dow closed at 11,020 on Sept. 18, down almost 20 percent from the beginning of this year. Only four times over the last 116 years has the Dow failed to hit, or come within 5 percent of, the year’s high during the three months surrounding a presidential election, according to InvesTech. “There might be a small rebound in the markets,” said long-term investor and financial blogger Eddy Elfenbein, who authors CrossingWallStreet.com, “but the American economy is in pretty rough shape.”
Even if the markets do not bounce back in time to fit the trend, America’s bruised economy may steer this November’s election to reflect another pattern: the ousting of the incumbent political party when the Dow falls between August and Election Day. “To the degree that the economy is front and center in this election – I would weigh against the Republicans – I would weigh against the party in office,” said Brett Steenbarger, a clinical psychologist and trading consultant.
Steenbarger’s assertion rings true; a falling Dow has historically spelled defeat for the incumbent political party. Only three times since 1920 has the party in power stayed in the executive office when the Dow was down between July 1 and Election Day, according to InvesTech data. In this election, however, stockbroker Chris Hildebrant feels the level of uncertainty surrounding the Democratic nominee, Barack Obama, could change the tide.
“People don’t know if Obama is ready – I think that’s adding a different level of uncertainly to this election,” he said. The latest polls have Obama and McCain in a statistical dead heat, which has investors gripped by the fear of the unknown. “Uncertainty is the thing that paralyzes the market,” said Hildebrant, adding that the close election is playing into the recent market activity.
Not until this Nov. 2 will Wall Street investors know how the then president-elect intends to handle financial regulation, military spending, health care development and energy policies, but even that clarification might not be enough to move the markets in a positive direction. Newly elected presidents tend to use the first years of their term to pass legislation that may sour the economy in the short run, but help in the long haul. Nearly half of the 18 bear markets of the past century have begun between 3 months prior and 12 months after a presidential election.
No matter who wins this election, it appears that current market movements will continue well into the next presidential term. “We really need clarity on how we will get out of this, and I’m not hearing that from either candidate – just lots of rhetoric,” said Steenbarger.
Elfenbein agrees. “I’m truly hearing a lot of hot air,” he said.
