There’s a growing bit of conventional wisdom that says that if Mitt Romney is elected, the stock market will soar, and if President Obama gets another term, we’ll enter a bear market. Romney said as much himself to a group of $50,000-a-plate supporters during his infamous 47% dinner talk. But does historical evidence support this claim? In a word, no.
Sure, there are plenty of investors who believe that the markets would favor a Romney victory. A recent Barclays survey of institutional investors, hedge-fund managers and corporate executives found that most thought that stock markets would rally more, and longer, under a President Romney, though their enthusiasm was muted by worries over a more hawkish Fed (Romney has hinted that he’d like a Fed head that would tighten the money spigots) and protectionism. (Romney may score campaign points by talking tough about China, but no corporate leader wants to risk a trade war, or even a trade skirmish, with the Middle Kingdom, which has been responsible for the bulk of the world’s post-financial-crisis growth.)
But while much of Wall Street is, of course, going to believe in a candidate that is less likely to raise taxes on the rich and get tougher on banks, I’m more interested in the historical data put out by folks like renowned fund manager Ken Fisher, showing that over the past eight decades or so, stocks tend to rally no matter who is elected President, mainly because it alleviates political uncertainty and (at least for a few months) unleashes pent-up animal spirits. Interestingly, the only scenario in which stocks do tend to dip is when a Republican President is replaced by a Democratic one — which, obviously, isn’t an option this time around.
I think it’s fair to say that bonds will continue to do better with an Obama victory, because that’s likely to indicate a continuation of “business as usual” at the Fed, as HSBC head of FX strategy David Bloom recently put it, meaning that Ben Bernanke and company will keep buying bonds and other low-risk assets to try to push investors into higher-risk assets like stocks. Historically, that’s actually pushed up stock-market prices — indeed, anyone who thinks Obama hasn’t been good for stocks should consider that equities have been up about 19% a year during his tenure, as the Financial Times’ James Mackintosh pointed out in a smart piece (registration required) on Sunday.
But I’m skeptical of the idea that a Romney victory would unleash some sort of new bull market in stocks. After all, he’s talking about reducing the money flow that has enabled the rally so far, and also tightening public budgets at a time when companies aren’t spending — and consumers can’t pick up the slack for the public sector without creating a new credit bubble. As Jim O’Neill, head of Goldman Sachs Asset Management, said recently in a note to investors, “A combination of large fiscal tightening and pressure on the Fed to reduce its monetary friendliness doesn’t seem like a great combination for equity markets.”
Indeed, I think that while we’ll see a modest rally no matter who’s elected, the next few months of market performance will be driven by two things. One, whether or not Congress comes up with a quick resolution to the fiscal cliff (there is an argument to be made that Romney could do that more quickly, though who the heck really knows). And two, even more important, the economic situation in the rest of the world. If you look at what has brought the market down recently, it’s been the weaker-than-expected earnings of companies from Dow to 3M to Apple, caused largely by continuing troubles in Europe and slower growth in emerging markets like China, India and Brazil. That’s something that has nothing to do with elections — and it’s something no President will able to control.