Does the presidential challenge between Barack Obama and Mitt Romney keep the lists in suspense? Should those who are deciding how to allocate their investments take into account the political leadership factor in view of the upcoming elections on November 6? Rivers of ink have been wasted on the relationship between stock performance and the elections. For some, the arrival of the Republicans helps the blue chips, while the victory of the Democrats helps the small caps, thanks to the higher levels of government spending that tend to favor smaller companies. Then there are those who are worried about the repercussions on the pharmaceutical sector of a possible Romney victory: what will happen to Obama's health care reform, what will be the repercussions on pharma companies already committed to adapting with new projects? But there are also those who closely follow the defense sector and aircraft manufacturers, who could benefit from Romney's arrival.
It is news these days, according to what the New York Times reported, that several large US companies have sent letters or information packets to their employees to suggest, and sometimes explicitly advise, how to vote in the presidential elections. In some of these letters, the executives warn that a re-election of Barack Obama could damage the company, due to an increase in costs due to health care reform or a tax increase, thus fearing a risk for employment. Already by descending directly into the arena for the presidential battle, right-wing investors say that another four years of the current administration will lead to a double dip recession and a stock market crash. Conversely, left-wing investors warn that the right's proposals are nothing more than a rehash of the same policies responsible for leading to the worst recession since the Great Depression.
“Policy experts argue that the health of the US economy and the stock market are suspended pending the upcoming presidential elections. When it comes to driving the stock market, politics actually takes a step back,” he says Nicola Meotti, Country Manager for Italy of the AllianceBernstein management company. Which warns: it is difficult for investors to identify a long-term link between political parties and markets or tax law.
Sure, for AllianceBernstein this does not mean that political choices are irrelevant. On the contrary. “We strongly believe that Washington matters to investors when there is a clear relationship between specific legislation and corporate earnings,” Meotti says. Especially for bottom-up managers specific legislation counts: “The ethanol policy, for example, in the USA and the 50 million acres of corn planted every year could mean that a reduction in subsidies would result in significantly lower corn prices, going to potentially affect companies operating in the agricultural sector. The allocation to Defense will have a more direct impact on aircraft manufacturers”, Meotti points out.
But “can party leadership drive stock market returns?” “For nervous investors pondering critical asset allocation decisions, could political affiliation drive return expectations?”, asks AllianceBernstein. "We do not believe that electoral fever, and the prospect of a victory for one of the two candidates, could influence our selection of stocks", Meotti replied. A conclusion to which AllianceBernstein arrives by analyzing the empirical relationship between the party in charge of the White House and the stock market including the economy of the last seventy years.
“We asked ourselves – explains Meotti – whether there is a correlation between the incumbent party in the White House and stock market returns or economic growth. The result is as surprising as it is clear: the stock market rose and fell under the leadership of one party or another from 1939 to 2011. The correlation between a political party and the S&P 500 is not at all significant (+0,09 %). Similarly, the correlation between GDP growth and the White House is 0.25, a rather weak relationship from a statistical point of view. Not only. The study analyzed the relationship between the tax capital gain and stock market returns over the long run, using the average of the actual tax capital gain and the annual performance of the S&P 500 index from 1954 to 2008. But it found no visible correlation. between the two (the statistical correlation of 0.12 is not significant).
