The Election and You

For many Americans, Tuesday, Nov. 2 will be a tense and exciting day, as the country decides who will sit in the White House for the next four years. For Wall Street, however, which candidate ultimately rules the world's highest roost may only be a short-term concern. According to many industry insiders, the election probably will cause an initial wave in the markets, but it is one that's unlikely

For many Americans, Tuesday, Nov. 2 will be a tense and exciting day, as the country decides who will sit in the White House for the next four years. For Wall Street, however, which candidate ultimately rules the world's highest roost may only be a short-term concern.

According to many industry insiders, the election probably will cause an initial wave in the markets, but it is one that's unlikely to rock many boats.

“From a big-picture viewpoint, a change in the administration is not going to have a big impact,” says Greg Valliere, political economist for Charles Schwab.

But that doesn't mean Wall Street handicappers don't have their favorites.

“Bush is the devil you know,” quips Tobias Levkovich, Washington Research analyst with Smith Barney. “And the markets tend to like certainty.”

Long term, much of the concern over the prospect of a John Kerry victory has revolved around his expressed intentions to roll back President Bush's tax-cut package. The Kerry plan intends to restore income tax rates for the top two brackets to 39.6 percent (from the current 35 percent) and 36 percent (from the current 33 percent), as well as return marginal rates on dividends and capital gains to the levels they were at under Clinton — but only for families making more than $200,000.

But experts note that the high probability of a divided government is a powerful obstacle to such an overhaul.

Kerry “doesn't have any chance of undoing the Bush tax cuts,” says Valliere. “Congress simply won't let it happen.”

Chris Edwards, a tax policy expert with the Cato Institute, adds that such a move would be fundamentally flawed.

“First, it would cause an immediate and negative reaction in the market, which no president wants,” says Edwards. “But that aside, how he's going to structure these changes so they only affect the top two brackets is certainly not clear.”

Moving beyond the issues, the general buzz around election time is that Republicans are typically better for the markets. But past performance under the two political parties reveals a little irony; historically, the Democrats have been better for the market, at least according to one study.

Pedro Santa-Clara and Rossen Valkanov, finance professors at UCLA, in a recently published study found stock market returns have actually favored Democrats. The study, called “The Presidential Puzzle: Political Cycles and Stock Market,” found that between 1927 and 1999, returns were an average of roughly 5 percent higher when a Democrat was in the White House.

Remocrats vs. Depublicans

As the table below shows, both parties are good for the equity market. The table shows the average annual return of the Dow Jones Industrial Average and the political party of the president in the 100 years ending 2001.
Post-Election Year Midterm Year Pre-Election Year Election Year
Republicans
Avg. gain 4.3% 3.2% 3.7% 14.2%
No. of years up 6 7 10 10
No. of years down 8 7 4 3
Democrats
Avg. gain 6.2% 3.3% 22.8% 3.9%
No. of years up 7 7 11 7
No. of years down 5 5 1 5
Source: Stock Traders Almanac Online
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