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U.S. Market Outlook: An election year loss

Posted January 8, 2008

"U.S. election years have, historically, seen healthy gains in the U.S. equity market. To some extent this can be put down to the market’s view that either the incumbent president or, where the president has served two terms, the ruling Party has an incentive to “buy” votes by loosening fiscal policy." — Jeremy Batstone-Carr.

Blogger's note: The MoneyWeek team has done it again. Jeremy Batstone-Carr put his hand on the pulse of two of our favorite topics, politics and the U.S. markets and turned out a fascinating article about the coming year for both. You can find the article here or read on for more.

by Jeremy Batstone-Carr

Baltimore and London – (TFN):  U.S. equities won't be the winner this election year.

Historically, U.S. presidential election years have been good for the U.S. equity market. According to Capital Economics, since 1897 the Dow Jones Industrial Average has risen by an average of 9.1% against an average increase of 7.2% in non-election years.

Similarly, the S&P 500 has increased by an average of 9.3% in election years, against 6.5% in non-election years. Note, however, that these are averages and thus smooth out what can be pretty large fluctuations in index performance over time.

That said, looking at the nine election years from 1970 reveals a very similar picture; the Dow Jones rises by 8.2% during election years, and the S&P 500 by 10.8%. The most obvious explanation for this relatively strong showing is that election years have tended to be good years for the U.S. economy. This does not look like it's going to be the case in 2008.

U.S. Market Outlook: Does the ruling party 'buy' votes with loose fiscal policy?

U.S. election years have, historically, seen healthy gains in the U.S. equity market. To some extent this can be put down to the market’s view that either the incumbent president or, where the president has served two terms, the ruling Party has an incentive to “buy” votes by loosening fiscal policy in order to boost economic output growth.

This view is indeed supported by Gross Domestic Product data which reveals that US activity increased by an average of 8.1% in election years and by 7.1% in non-election years over the past century or so. However, a closer examination of fiscal policy heading into presidential elections does not support the assertion that it is loose fiscal policy alone which provides the boost on each occasion. Cyclically adjusted federal deficits have actually fallen on average over the two years prior to an election. Read on to learn what to expect in the coming election year and how that election will affect your investments.

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