Markets aren’t reacting happily to Barack Obama’s re-election; most global indexes have posted declines since the vote on Nov. 6.
Is this the start of a broader selloff or just a hiccup? History reveals one precedent with eerie similarities to today, and its message is encouraging. If past is prologue, the next few weeks may feature more doom and gloom – but investors who stick around for the long haul should find a silver lining.
In a recent report, S&P Capital IQ’s chief equity strategist Sam Stovall looked back to 1900 and found that, in contrast to the experience this year, the S&P 500 typically rises when an incumbent U.S. president wins re-election and drops when the challenger takes office.
The upswing is significant. If the incumbent returns, the index tends to climb 1.2 per cent between the election and the end of November, and 3.7 per cent through the remainder of the year.
But it’s not just 2012 that breaks this happy pattern. Consider 1948, when Harry Truman, who had taken the presidential reins in 1945 when Franklin Roosevelt died, managed to defy conventional wisdom and defeat New York Governor Thomas Dewey.
Prior to the 1948 election, the S&P 500 had gained 9.2 per cent that year. Following Mr. Truman’s victory, the S&P 500 fell 11.7 per cent by the end of November.
The 1948 election differed from its 2012 counterpart in that Mr. Truman was considered the underdog by pollsters while Mr. Obama was the slight favourite, but otherwise the stock markets and politics of the two periods bear a strong resemblance – most notably in the legislative logjam that preceded the election.
In 1947, Mr. Truman faced an unco-operative Congress that hindered him from taking decisive action on the economy; in 2011, Mr. Obama confronted a similar situation. Both times, the standoff manifested itself in flat markets – 1947 and 2011 are the only pre-election years in which the S&P 500 closed out the year at the same value it started at.
The commonalities continue into the two election years, when stock markets initially rose in the runup to the vote, then slid after the result. If the S&P 500 were to follow the trend of 1948, it could fall as low as 1,261 points by the end of the month – just a notch over where it started in January.
But the Truman-era experience suggests that investors have reason for hope, Mr. Stovall says. The S&P 500 rebounded slightly in December, 1948 – and advanced 10.3 per cent in 1949. “Let’s just hope the comparison plays out,” he writes.
Investors sticking with the S&P 500 in the long term, then, should find their patience rewarded. As singer-guitarist Bonnie Raitt once suggested, it’s best to hold onto a silver lining instead of letting things drag you down.