Sell Romney, buy Obama.
Okay, that might be a terribly simplistic way to summarize the likely impact on the stock market now that the U.S. presidential election is heating up with Wednesday night’s debate between Mitt Romney and Barack Obama.
But the numbers do make an interesting case in favour of Democratic presidents over Republicans, even as several prominent voices proclaim Mr. Romney the pro-business candidate.
“Romney is Wall Street’s preference by, oh, only a country mile,” said David Rosenberg, chief economist and strategist at Gluskin Sheff.
You have to wonder why. Birinyi Associates looked at the annual returns for the S&P 500, going back to 1928, and then grouped them according to which party occupied the White House. The result is remarkably lopsided.
If you had only invested in stocks when a Democrat held the top job, you would be sitting on an average annual return of 10.2 per cent, which is exceptional next to the average return for the market over all. And if you don’t like volatility, the Democrats were also your friends: The S&P 500 turned in a positive year more than two-thirds of the time.
Returns during Republican years trailed badly, with an average annual gain of 5.6 per cent, or nearly half the return under Democrats.
The lead becomes even more pronounced when you restrict your view to the first years of presidential terms.
For the Democrats, the first year in office sent the S&P 500 up an average of 10.3 per cent. For the Republicans, the return is a mere 0.3 per cent, with the index ending the year down 64 per cent of the time.
Admittedly, averaged historical numbers have little bearing on what the current candidates are likely to do for stocks over the next four years.
Birinyi Associates thinks the past is largely anecdotal: “Other than it being mildly interesting, it isn’t anything I’d let influence an investment choice going forward,” said Kevin Pleines, equity market analyst.
Mr. Rosenberg sees trouble ahead regardless of which party wins. A sweeping victory for Mr. Obama might push him toward a “soak the rich” mandate.
And continuing political gridlock if Mr. Obama is re-elected but the Republicans take Congress could see Washington unable to deal with automatic tax increases and cuts to government spending, also known as the dreaded fiscal cliff.
As for a Romney victory, it raises the question how he can back away from a trade war with China and make his fiscal numbers add up.
Still, Mr. Rosenberg is leaning toward a Republican victory: “[Mr. Romney’s] willingness to dismantle Obamacare, his seemingly pro-business bent and supply-side economics bias, his willingness to tackle entitlement reform, and his policy plank of refraining from raising top marginal tax rates at all – especially on dividends and capital gains – would very likely be met with wild cheers and high-fives in the financial markets.”
The question is whether those cheers will be enough to drive the S&P 500 higher over the next four years.
Stephen Jarislowsky, chairman and chief executive of Jarislowsky Fraser, isn’t so sure. Another Obama victory means more gigantic deficits, gridlock means more political bickering, and a Romney victory could give a voice to “crazies” in the Republican party.
“It’s called a Hobson’s choice,” he said. “Unless there’s a sea-change in the United States, I don’t see how they are going to get out of this mess.”