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In December of last year, we read a few posts suggesting 2011 would see above average returns for the S&P 500 since it was the third year of a presidential term, which has historically proved lucrative for equity investors (chart from Credit Suisse):
So much for that idea: at pixel time, the S&P 500 was down 3.36 per cent year-to-date. Still, a new year — an election year — is almost upon us and that means it’s time for another round of spurious efforts to link politics and markets. Advance political risk analysis this is not. Still, it’s quite fun and we’re suckers for psephological gambling.
“If historical patterns persist, next year we can expect equity markets to gain in double digits,” write Credit Suisse in a note out Tuesday on presidential elections and the S&P 500. This is because the average annual return for the last 50 years is not far off double digits S&P 500 has historically done better in the fourth year when there is a Democratic president (or on average in any year when a Democrats is in the oval office):
This is fairly well known, and perhaps should be borne in mind by those in New York planning to throw money in Mitt Romney’s bucket when he comes to town on Wednesday. In fact, this is probably one of the few patterns deserving a second look, especially given other work on economic performance under different parties. (We’d also like to see the bond market performance under different presidents.)
But the CS quants have gone further and broken down what has happened to the S&P 500 under different fourth year scenarios. In other words, is a strong S&P 500 performance associated with a particular electoral outcome? And given that elections always take place in November, can we use the S&P 500 to predict whether Obama will win a second term?
No, of course. But here’s an interesting chart anyway:
The chart on the right hand makes some sense: re-election is associated with a high-return stock market, or at least it’s associated with a positive view of the economy, for which the S&P 500 is an imperfect but useful proxy.
But what about the chart on the left hand side? Without upsetting the Gods of Directional Cauality too much, does this suggest a bumper stock market year rewards Republican candidates? Here’s a more detailed breakdown from Credit Suisse:
Now, without being slain by the Lord of the Small Sample (there are five R to D transitions in the sample, which begins in 1926 and therefore includes Hoover-to-Roosevelt and Bush-to-Obama crisis years), does the Republican to Democrat move mean anything? Do things need to get really bad before the stock market can convince Americans to vote Democrat?
We have no idea, of course. A lot of bunk is talked about whether this or that indicator will determine a President’s re-election chances. Several pundits have suggested that Obama needs the unemployment rate to fall beneath 8 per cent to stand a chance, for example. If he won with the current rate of 8.6 per cent, this would set a post-war precedent, it is rightly added. However, we’re already living in a “post-war precedent”, so to speak, and our guess is that momentum matters more than mass in this case. Regardless, voters, especially in the United States, make their decisions on a whole host of economic and non-economic, rational and irrational reasons.
Though that won’t help us feel a little sorry for Jimmy Carter; perhaps he thought he stood a chance:
Related links: A hung market – The Economist (2004) Presidential Election Cycle (Theory) – Investopedia On the Maddeningly Inexact Relationship Between Unemployment and Re-Election – Nate Silver Elections and the markets, avoid silly data-mining charts edition – FT Alphaville
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