NEW YORK – Wall Street prefers Republicans, McCain supporters argue. But stocks have done better under Democratic presidents, Obama supporters fire back.
When it comes to the stock market — especially this turbulent market — does it really matter who is elected president?
Yes and no. Politicians do influence the economy — and they'll play a big role in how the country emerges from this current crisis. But analysts say neither presidential candidate can be a cure for what's ailing Wall Street.
"The economy is a big, big machine, and the president is one government bureaucrat," said Ron Florance, Wells Fargo Private Bank Director of Asset Allocation.
Moreover, most analysts believe the battered stock market has nowhere to go but up next year, no matter who ends up in the White House — and history will probably give the victor credit even if he actually had little to do with the rally.
"The timing couldn't be better," Florance said.
Still, the stock market is just one part of the economy, and under either Barack Obama or John McCain, the United States needs to recover from a downturn whose severity has not yet been determined. And either candidate will face a budget deficit of around $500 billion when he's sworn into office — a shortfall expected to climb to $1 trillion next year.
Because of the deficit, the financial climate might end up affecting the new president's policies more than his policies will affect the financial climate.
"This whole financial crisis will largely serve as an agenda buster for at least the first year," said John Lynch, chief market analyst at Evergreen Investments.
That's not to say, of course, there aren't differences in the impact McCain or Obama would have on U.S. businesses, and in turn, their stocks. Robert Froehlich, an investment strategist at Deutsche Bank, said it's likely that under Obama, the alternative energy sector would do well, and possibly the paper and steel industries if he enforces trade treaties. And under McCain, Froehlich said, it's likely that big energy companies would do better because he does not support a windfall profits tax, and that financial companies could benefit because of his stance on dividend taxes, long-term capital gains taxes, and estate taxes.
"Don't expect the next president to say, 'I'm strapped with this economic crisis, I'm going to throw all my plans away,'" Froehlich said.
There are historical trends one can draw between presidents and how the stock market performs. The question is how seriously to take them.
The Dow Jones industrial average and the broader Standard & Poor's 500 index have posted larger returns during the terms of Democratic presidents. But this statistic doesn't prove that Democratic policies boost the stock market — the major indexes have also done better under a Republican Congress than a Democratic Congress.
Another pattern to take note of is the stock market's apparent four-year cycle, described by market historian Yale Hirsch in his Presidential Election Cycle Theory. The theory says the stock market does well in a presidential election year, badly in the year after the election and then improves until the next presidential election. This pattern has held up for most of the century, although it's being tested by the two terms of President George W. Bush.
However, the monetary policy of the Federal Reserve, rather than the influence of the president, can explain this pattern better, according to a 2007 study by CFA Institute Education managing director Robert Johnson, University of Wisconsin professor Scott Beyer and Northern Illinois University professor Gerald Jensen. Their study found that the Fed has tended to lower interest rates during the latter half of presidential terms — and lower interest rates encourage borrowing and spending.
At the end of the day, using the returns under previous presidents to predict the market's performance under another president gets to be like reading tea leaves. You'd probably do just as well basing your investments on next year's Super Bowl — Wall Street's infamous "Super Bowl Indicator" postulates that a victory by a team that was part of the original National Football League, before it merged with the American Football League in 1970, will result in better gains for the stock market. It's actually been right most of the time.
The lesson, of course, isn't to base investment choices on a football game. (Anyone who rushed to buy stocks after the New York Giants' win in 2008 probably got pretty burned). Rather, the point is that correlation isn't the same as causation.
And investors shouldn't get too caught up in the market's short-term reaction after the election results. The Dow surged, for example, after President Hoover was elected in 1928 — and the next year the it crashed, ushering in the Great Depression.