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Wall Street may decide outcome of US polls

Monday, March 28, 2016 - 05:50

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There is some statistical evidence that election-year market returns diverge from the average. That makes the odds of a gain in an election year slightly better than those for any other year.

SOME people believe the US stock market follows the American presidential cycle, but recent elections suggest it could be the other way around. The performance of the stock market could help decide whether Donald Trump, Hillary Clinton or someone else wins the White House this year.

One reason election years are traditionally thought to be good for Wall Street is that the uncertainty about what direction economic policy will take gradually clears up as the likely winner becomes clear, said Joe Kinahan, chief derivatives strategist at TD Ameritrade. That goes back to the old adage, that "markets hate uncertainty".

There is some statistical evidence that election-year market returns diverge from the average. "The S&P 500 gained an average 6.1 per cent during the fourth year of the presidential cycle since 1948, and rose in price 76 per cent of the time," said Sam Stovall, chief equity strategist at Standard & Poor's Capital IQ.

That makes the odds of a gain in an election year slightly better than those for any other year, even if the overall gains are no better than the long-term average. It is less clear what drives the correlation. In the last two decades, as the proportion of Americans' retirement savings in stock accounts and 401(K) mutual fund plans rose, it could be argued that a new dynamic emerged. Rather than the stock market reacting to politics, there are grounds to suggest that it's politics that's moving to the Dow Jones Industrial Average and Standard & Poor's 500.

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These broad market gauges provide the average American a way to take the temperature of both the economy and their own retirement savings. Economists have already identified the "wealth effect": When Americans feel good about their home values and savings-account values, they are likely to increase spending. At times when consumers feel that their wealth is diminishing, they often cut back on discretionary spending.

Could the same "wealth effect" influence how people vote? Going back to 2000, the performance of the stock market in an election year appears to be an accurate indicator of the outcome of the presidential election. During strong years for the market, the incumbent party emerged victorious in the November elections. During weak market years, the incumbent party lost the election.

In other words, Democratic presidential candidate Mrs Clinton should hope for a revival of the bull market. Republican presidential contender Mr Trump could lose some of his reputed billions in a market crash, but it could help him win the presidency.

It was in the 1990s that Americans started watching the stock market on television. The first continuous ticker on American TV launched on CNN in 1996. During the dotcom years of the late 1990s, the stock market was never far away, blaring from TV and in dinner-party conversation.

Al Gore, of the incumbent Democrats, was leading Republican George W Bush in the polls early in 2000. Then came the dotcom crash. By November, the Dow and S&P 500 had both fallen by more than 10 per cent from their peaks in the previous year, and Mr Bush won the elections. His re-election in 2004 coincided with a strong market, when both benchmark indexes rose by about 10 per cent.

The stock market's influence in 2008 was even more clear-cut. In early September 2008, John McCain, of the incumbent Republicans, was leading Democrat Barack Obama in the polls, benefiting from the success of the "surge" he had championed in Iraq. Then Lehman Brothers went under and a terrified nation watched the stock dials on cable TV register daily drops of a magnitude not seen since the 1987 crash. America voted overwhelmingly for a change in the 2008 election. But 2016 could prove to be a year of exceptions. Even by the standards of a nation that counts a B-movie actor as one of its most celebrated presidents, the current campaign is defying expectations.

"The political situation within the US is unravelling quickly - it's hard to imagine a scenario in which a political party's previous presidential candidate publicly decries his own party's current frontrunner! But this happened (the other week), with the former arguing that the latter's election could cause a recession and worse," said Kristina Hooper, head of US capital markets research & strategy for Allianz Global Investors, in a note. Mr Trump's mercurial personality and his apparent willingness to throw out his party's economic platform mean that the market could respond to politics this year, rather than vice versa.

"At this point, most major candidates of both political parties have weighed in against trade deals, including existing ones," said analysts at brokerage Barclays, in a note to clients. "In particular, the leading candidate on the Republican side has promised to declare China a currency manipulator in January 2017. Whether this is political rhetoric or not, equity markets globally are unlikely to dismiss this prospect completely; as November nears, this could hurt equity prices."

Still, there's at least one stockmarket sector that's set to gain from this bizarre campaign year, no matter who wins: Mr Trump's old enemies in the media.

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