The Edmond Sun

October 19, 2012

What will the market do after the elections?

Nick Massey
The Edmond Sun

EDMOND — In a little more than three weeks, the Nov. 6 elections will be over and we will finally know who will be in the White House and in Congress. Regardless of the outcome, many people will just be glad that it’s over. It is the unknown that bothers people more than anything else.

Philosopher Freidrich Nietzsche wrote, “To trace something unknown back to something known is alleviating, soothing, gratifying and gives moreover a feeling of power. Danger, disquiet, anxiety attend the unknown — the first instinct is to eliminate these distressing states. First principle: Any explanation is better than none … The cause-creating drive is thus conditioned and excited by the feeling of fear … .”

In other words, we like to feel we know what is going on and any explanation is better than none. And the simpler the explanation, the better.  We might hear that the market went up because of this, or went down because of that, and we feel better. We think, “I know what happened” even though down deep we know it’s far more complicated than that. Dealing with the unknown can be disturbing so we look for simple explanations.

I am frequently asked what I think will happen to the stock market depending on who wins the presidential election. The outcome is still too close to call and I’m not going to try and predict that one. We do know, however, that there have been a number of studies done on whether the market goes up or down when a Democrat or Republican wins, an incumbent wins or loses, which party controls which house, etc.

There are a lot of theories out there suggesting a particular outcome from the elections, but I suspect much of it is wishful thinking depending on which person or party you are rooting for. However, the facts seem to suggest that over the long-term it doesn’t matter much in terms of what the stock market does. The long-term effect on the economy is another matter, but we’re talking about the stock market for now. I know, that probably doesn’t match with your personal hope, but I’m just the messenger.

According to a study by Forbes, they looked at how the market has historically performed during an election year. Of the 23 election years since 1920, 15 were positive, or 66.7 percent. However, ignoring whether or not they were election years, during those 91 years, 62 were positive anyway, or 68 percent. The market was up about 67 percent of the time whether an election year or not.

Let’s look at this from a political party perspective. Of the 23 election years, the market was up 63.3 percent of the years when a Democrat was in the White House, and 66.7 percent when it was a Republican. In terms of stock market performance during an election year, we can reasonably conclude that it makes no difference which party is in the White House at election time. Therefore, it would not be wise to base investment decisions solely on that statistic.

This, of course, speaks to longer-term trends in the markets. Short-term moves in the markets can be dramatically affected by a number of things, most of which are quite unpredictable. It is important to remember that while the economy and the markets are related, fundamentals do eventually matter. However, the stock market can completely divorce itself from longer-term economic trends for awhile. The current uptrend in the market this year is in many ways being driven by financial stimulus and hope that government and central banks are coming to the rescue. Take the hope away, even briefly, and the market can fall quickly. The short-term effect of current central bank monetary policy (i.e. quantitative easing), both here and globally, is to drive asset prices up. All of that extra liquidity is going somewhere, and the stock market is one of them.

So what does the upcoming presidential election mean for the stock market short-term? If I had to guess, and it certainly is just that, I think immediately after the elections the market goes up if Obama wins and goes down if Romney wins. Before I get hate mail from all my Republican friends, hear me out. Don’t get me wrong, that is not an endorsement of one or the other, but what I think will be the traders’ reaction near term.

Because of the economic stimulus provided in the past few years, the market has become like a drug addict constantly needing the next fix to keep from going into withdrawal. An Obama win will be perceived as a continuation of stimulus and Ben Bernanke, i.e. continued doses of drugs.  While I don’t think it is good for the economy in the long run, the market likes it in the short run and doesn’t want to come off the high.

If Romney wins it likely means the end of further stimulus, the end of Ben Bernanke in 2014 and the end of QE. Whether you think that is a good thing or bad thing, and I think it’s a good thing, the market reaction will be a short-term sell-off as the addict realizes that the party is over and the next fix is not coming. The long-term market trend will be the exact opposite for each candidate, but that is a story for another day.

Of course, after the dust settles in the coming months, economic fundamentals will matter again and we’ll have to see what our policymakers do to get us all out of this mess. As for the short-term reaction, we’ll find out soon. Thanks for reading.

NICK MASSEY is a financial adviser and president of Householder Group Financial Advisors in Edmond. Massey can be reached at Securities offered through Securities Service Network Inc., member FINRA/SIPC.