Wall Street to Cast Its Vote Tomorrow
When Democrat Harry S. Truman defeated Republican Thomas E. Dewey in 1948 in one of the biggest presidential upsets ever, the stock market suffered its own form of upset. On the day following the election, the Dow Jones industrial index tumbled 3.8%, as generally Republican Wall Streeters greeted the news with dismay.
Today, as American voters select a new President, market pundits say something similar to 1948 could happen again if Democrat Michael S. Dukakis manages to pull off a Trumanesque upset of Republican George Bush. A 3.8% drop in the Dow would be equal to about 80 points--well within the range of an expected selloff from investors who generally believe that a Republican Administration would be better for business.
“I think hell would break loose,” says Yale Hirsch, editor of Stock Trader’s Almanac, who professes to be a Democrat and Dukakis supporter.
But while a Dukakis victory might hurt stock prices in the next few days--indeed, some of Monday’s 21.16 point decline in the Dow was blamed on polls that showed Dukakis gaining ground--a Bush win might not help prices that much in the short run, experts say. A GOP victory is already factored into stock prices, just as it was in 1984, when Ronald Reagan fulfilled expectations and defeated Democrat Walter F. Mondale. The market actually fell in the three days following Reagan’s landslide victory, says Arnold Kaufman, editor of Standard & Poor’s Outlook newsletter.
“I expect the market to do little if Bush wins. It’s possible it will go up a little, but there won’t be any celebration,” Kaufman says.
And if history is any indication, the market in the longer run may actually do better under Dukakis. Since 1948, stocks have performed better under Democrats than Republicans. Standard & Poor’s 500-stock index rose an average of 42.4% under the four postwar Democratic administrations and only 32% during six Republican terms, according to Standard & Poor’s Outlook.
Under Truman, for example, the market overcame its initial shock to his surprise victory and posted a 74.8% gain on the S&P; 500 in the four calendar years from 1949 to 1952. Among postwar administrations, that gain is topped only by the S&P; 500’s 75.6% rise in 1953-56, during Dwight D. Eisenhower’s first four calendar years as Chief Executive.
Under Ronald Reagan, the S&P; 500 gained 23.2% in 1981-84 and 63.8% so far in his second term.
“Democrats are perceived to have a somewhat more expansionary bias, and a little bit of inflation is good for stock prices,” Norman Mains, chief economist at the investment firm Bateman Eichler, Hill Richards, says in explaining the market’s better showing under Democrats. He adds that stocks tend to do better in the later years of Democratic administrations because “the longer a Democrat is in office, the more business recognizes that he is not going to socialize the country.”
To be sure, many other factors--such as interest rates, inflation and international political events--can move stock prices dramatically. Strong gains in the first year of a new Administration also could be a function of the market’s poor performance the year before.
Market Rebounded
Such was the case in the first year following John F. Kennedy’s win in 1960, when the Dow gained 21.1%, thanks to a sharp downturn before the election. Similarly, the Dow gained 47.9% in the year following Franklin D. Roosevelt’s 1932 victory. But that came after the Dow had lost nearly 90% of its value in the three years following the crash of October, 1929.
Among the more predictable election-related stock patterns is the tendency of the market to do well in the months leading up to an election. Not including this year, the Dow on average has risen 8.5% in the four months preceding each election day since 1900, Bateman Eichler’s Mains says.
Why? Because incumbent administrations usually follow expansionary policies in election years, hoping to keep the economy strong--and voters happy--to enhance chances of maintaining control of the White House.
But the Dow has done less well in the first year following an election, rising only 3.1% on average, Mains notes. That is because the new Administration--and the Federal Reserve--usually reverse the expansionary policies to keep the economy and inflation from overheating. New presidents also seek to implement long-term economic policies in the early part of their terms, policies that may not pay off immediately.
Will this pre- and post-election pattern hold up again this time? So far, it hasn’t. In the four months leading up to today’s vote, the Dow is virtually unchanged, compared to the average 8.5% gain.
Mains attributes this relatively poor pre-election performance to negative campaigns waged by both candidates. “No candidate is giving the voters clear choices as to whether they will be more prosperous with one or the other,” Mains complains. “When the focus is on release programs from prisons, that’s not going to have a positive impact on stock prices.”
Some pundits don’t see a particularly strong market over the next year either, regardless of who wins. Bush may not have a cooperative Congress, since the Senate and House are expected to remain under Democratic control, S&P;’s Kaufman says.
And while Dukakis’ policies may be somewhat more expansionary and potentially more inflationary--a situation that could boost stocks--”we’re at a point on the inflation scale where any additional inflation would be bad for the market,” Kaufman says.
THE WHITE HOUSE FACTOR ON WALL STREET--Charts show the November average of Standard & Poor’s 500-stock composite for each year during the last eight presidential administrations.
Ronald Reagan Gerald R. Ford Lyndon B. Johnson Dwight D. Eisenhower Jimmy Carter Richard M. Nixon John F. Kennedy Harry S. Truman Source: Standard & Poor’s Corp.
