History on how presidential elections affect stock markets

ByABC News
November 5, 2008, 12:01 AM

NEW YORK -- Money and power collide every four years at the intersection of Wall Street and Pennsylvania Avenue.

Even though the U.S. president can't legislate bull markets or veto bears, that hasn't stopped historians from crunching stock returns to determine what impact politics has on stocks.

Let's bust one myth: namely, that Republican presidents are better for stocks. It is not true. In election cycles since World War II, the Dow Jones industrials have posted bigger average returns under Democratic presidents, the Stock Trader's Almanac says.

Wall Street's scrutiny of the 2008 race for the White House between Democrat Barack Obama and Republican John McCain has been especially intense given the fragile state of the economy.

"The credit crisis has forced both candidates to put the economy at the center of their campaigns," notes Robbert van Batenburg, head of global research at Louis Capital Markets, in a report, "The Final Stretch: Stocks Sensitive to Election Outcome."

Wall Street has been churning out election-related research on stocks and the presidency:

In "Election 2008," Jeffrey Kleintop, chief strategist for LPL Financial, says stocks tend to perform better in periods of legislative gridlock, when presidential power is offset by the opposition party controlling Congress.

However, it appeared late Tuesday that although Obama won the White House, Democrats did not gain control of 60 Senate votes, which would have given them a filibuster-proof majority to push through their agenda. "While the president has a lot of impact on foreign policy and trade," he says, "the Senate sets the pace on taxes, laws affecting business and other issues of interest to investors."

In "Presidential Cycle," Ned Davis Research notes the S&P 500 posted its weakest returns in the first year of the four-year election cycle. Since 1900, stocks have gained just 3.4% on average in the post-election year, compared with gains of 4.0% in the midterm year, 11.3% in the pre-election year and 9.5% in an election year.

Even after Tuesday's 305-point surge to 9625 in the biggest Election Day rally ever, the Dow is down 27.4% this year. How have stocks fared from Election Day to year's end? When a Democrat wins, stocks have lost 1%, while rising 4% if a Republican wins, Bespoke Investment Group says.