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Personal Economics
Bitter election could spell trouble for stocks
Looking at the past 16 races, it's clear the markets favor consensus and certainty -- and the hard-feelings squeaker of 2004 provides anything but.
By Brett Steenbarger
While the second presidential victory of George W. Bush achieved a greater plurality than his first, his re-election has done little to reassure the public about the split between Red and Blue, and that could affect our investments over the next four years.
It isnt too difficult to say that Red and Blue reflect two world views. Red voters perceive internal threats to American values and external threats from terrorism. The Blue electorate is concerned about jobs and the economy and the perceived diversion of scarce resources to the Iraqi war. Each group looks at the other not as people who simply disagree with them. Rather, the other side represents a threat to their core beliefs.
How elections affect the markets
The intensity of the electoral divisions made me start thinking about a different question: How might the bitter lack of consensus affect the stock market?
I looked at the 16 presidential elections from 1940 through 2000 to see how the margin of victory in each election affected the Dow Jones Industrial Average ($INDU) over the next four years. I was especially interested in two groups of contests: - Elections with a sense of consensus. That means the victor won at least twice as many electoral votes as the loser.
- The divisive elections. In these, the winner took office with an electoral plurality of less than 2 to 1.
The results: | Presidential elections and the Dow | | Year | Candidate | Popular vote % | Electoral vote % | Dow % chg.* | | 2004 | George W. Bush | 51.07% | 53.16% | ? | | John Kerry | 47.99% | 46.84% | | | | | | | | 2000 | George W. Bush | 47.87% | 50.37% | -7.75% | | Al Gore | 48.38% | 49.44% | | | | | | | | 1996 | Bill Clinton | 49.23% | 70.45% | 81.00% | | Bob Dole | 40.72% | 29.55% | | | | | | | | 1992 | Bill Clinton | 43.01% | 68.77% | 84.60% | | George H. W. Bush | 37.45% | 31.23% | | | | | | | | 1988 | George H. W. Bush | 53.37% | 79.18% | 51.66% | | Michael Dukakis | 45.65% | 20.63% | | | | | | | | 1984 | Ronald Reagan | 58.77% | 97.58% | 76.73% | | Walter Mondale | 40.56% | 2.42% | | | | | | | | 1980 | Ronald Reagan | 50.75% | 90.89% | 29.86% | | Jimmy Carter | 41.01% | 9.11% | | | | | | | | 1976 | Jimmy Carter | 50.08% | 55.20% | -2.99% | | Gerald Ford | 48.02% | 44.61% | | | | | | | | 1972 | Richard Nixon | 60.67% | 96.65% | -0.25% | | George McGovern | 37.52% | 3.16% | | | | | | | | 1968 | Richard Nixon | 43.42% | 55.95% | 2.12% | | Hubert Humphrey | 42.72% | 35.50% | | | | | | | | 1964 | Lyndon Johnson | 61.05% | 90.33% | 8.33% | | Barry Goldwater | 38.47% | 9.67% | | | | | | | | 1960 | John F. Kennedy | 49.72% | 56.42% | 49.60% | | Richard Nixon | 49.55% | 40.78% | | | | | | | | 1956 | Dwight D. Eisenhower | 57.37% | 86.06% | 20.02% | | Adlai Stevenson | 41.97% | 13.75% | | | | | | | | 1952 | Dwight D. Eisenhower | 55.18% | 83.24% | 80.45% | | Adlai Stevenson | 44.33% | 16.76% | | | | | | | | 1948 | Harry Truman | 49.55% | 57.06% | 42.41% | | Thomas Dewey | 45.07% | 38.59% | | | | | | | | 1944 | Franklin D. Roosevelt | 53.39% | 81.36% | 29.33% | | Thomas Dewey | 45.89% | 18.64% | | | | | | | | 1940 | Franklin D. Roosevelt | 54.74% | 84.56% | 9.17% | | Wendell Willkie | 44.78% | 15.44% | |
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* From Nov. 1 of the election year to Nov. 1 four years later.
Sources: David Leips Atlas of U.S. Presidential Elections, and Congressional Quarterly and Pinnacle Data.
Three patterns emerge from the data:
1. Close electoral contests in the United States are the exception. Ten of the 16 elections between 1940 and 2000 saw the winner take at least twice as many electoral votes as the loser. To find an election before 1940 where the winner took less than two-thirds of the electoral votes requires going back to the 1916 campaign between Woodrow Wilson and Charles Evans Hughes. The current run of consecutive close electoral contests -- Bush-Kerry and Bush-Gore -- never occurred in the 20th century.
2. The Dow does better in the four years after an election with a large electoral plurality. After each of the 10 elections where the winner took the Electoral College by a margin greater than 2 to 1, the Dow gained an average 42.7% over the next four years. The six elections with smaller pluralities produced gains averaging 16.68%. This effect has been more pronounced in the elections starting in 1976. After the two really close elections -- 1976 and 2000 -- the Dow actually went down over the next four years. After each of the five other elections in that period, the Dow returned an average 65% over the next four years.
3. Strong market gains appear to be independent of political party. Two of the four best four-year returns came under a Democratic president (Bill Clinton) and two under Republicans (Ronald Reagan and Dwight D. Eisenhower). The two worst returns occurred during the one term of Jimmy Carter, a Democrat, and the current term of President Bush, a Republican.
Why do markets see big gains after big electoral victories? Big victory margins seem to enhance presidential leadership and influence. It may have been easier for Reagan in 1984 to deal with Congress after winning more than 97% of the electoral votes than for Carter, who won just 55% of the electoral vote in 1976. Markets may be less concerned with party affiliation than with presence of strong leadership and the ability to set and enact agendas.
An important implication is that certainty -- not liberal or conservative philosophy -- helps investors feel confident about committing funds. Companies and families are best able to plan for the future when they know the political and economic landscapes they face.
When theres a closely divided electorate or a president who loses his sense of mandate, investors become discouraged.
Consider the 1964 and 1972 landslides of Lyndon Johnson and Richard Nixon. The four years that followed each election were dreadful for investors. Johnsons support shrank as opposition to the Vietnam War grew. Nixons support was consumed by in the Watergate scandal.
When presidents have been able to serve two full terms -- Roosevelt, Eisenhower, Reagan and Clinton -- returns have tended to be above average.
A skittish market gives way to a huge rally
The psychology of certainty and uncertainty played itself out nicely in the stock market on Election Day. Early on, the market rallied on news of polls indicating growing support for Bush. Then, a late Drudge Report item said early exit polls favored John Kerry. Faced with the possibility of another locked election and more uncertainty, investors started selling.
As results came in during the evening, it became clear the president had the stronger position. Even if there were no final tallies in Iowa and Ohio, the market opened sharply higher the day after the election and continued climbing after Kerry conceded.
President Bush quickly sought conciliation with opponents at home and abroad while claiming a mandate with political capital to spend. Traders heard his message as a clear signal of policy direction and bid stocks to fresh highs.
Can we reconcile Red and Blue?
So can we sustain any post-election certainty when the values of the Red and Blue electorates are so polarized? Is there a purple middle ground?
Maybe. Consider an example from psychology: A couple who take their son to see a therapist. The boy's school has reported hes disruptive and wont do his work.
During the first visit, it becomes very clear that the parents have big conflicts as well. The father, the product of a strict upbringing, declares he believes the boy needs lots of structure and certain consequences. The mother interrupts to say its the fathers yelling thats producing the boys rebelliousness.
The couple is so tied to their positions they cant begin to consider the others point of view. And the son, who sullenly sits in his chair rolling his eyes in the argument, resents his role as the problem child and may not see any benefit to changing his behavior.
The counselor tries to help the parents by finding a goal that unites them and embraces their concerns. He encourages the son to create his own list of responsibilities and privileges. That way, the boy can prove hes capable of mature, adult behavior.
The son, eager to show that he isnt a child, suddenly has a vested interest in following rules that are his own.
The parents, encouraged to let their son internalize a sense of responsibility (lest he develop even greater truant behaviors), now find common cause -- and new roles. No longer are they mere agents of behavioral control. Now they are facilitators of a young mans self-determination.
Electoral divisions are hardly new
Value conflicts are not unique in American history. Our political parties emerged because of divisions between mostly northern Federalists, who supported a strong national government, and mostly southern anti-Federalists. For them, the sovereignty of states and individuals was paramount.
Even after the Civil War, the Southern and Northern states voted differently for decades. Change came about thanks to the same dynamic that brought the parents of the young man together: A newfound perspective that yields a sense of common cause.
What if President Bush acted like the counselor of our example and redefined the challenges ahead of us? Might Mother Europe and Father America change how they interact with Son Iraq?
Theres no guarantee that any effort he makes will find the Purple between the Red and Blue -- and help the markets. It is possible, however.
The family I described was an actual case of mine. Within weeks, the son was performing at the top of his class. Months later, the parents were still reporting harmony at home.
If the current split in the electorate is to be repaired by the younger Bush, it will be because he has found the vision thing that eluded the elder, redefining current challenges in a Purple way that adds White to Red and Blue.
Brett Steenbarger is Clinical Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, N.Y., and Director of Trader Development at Kingstree Trading in Chicago, Ill. He is the author of The Psychology of Trading (Wiley, 2003) and maintains a Web site on the topic at brettsteenbarger.com.
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