What Happens Now?

For those who are aware of stock market history, the election of Barack Obama is cause for some optimism about the direction of stock prices. Despite the fact that the incoming President will face serious fiscal problems, including an ongoing credit crisis, a stumbling economy, and a burgeoning debt load, market history is on his side, say some Wall Street optimists.

First, there’s the typical post-election rally. Traditionally, the market surges after a presidential election, and most analysts expect that to happen again. However, a looming recession and recent discouraging unemployment numbers have tempered that tendency this time around. Perhaps more important from a market historian’s point of view is how the market reacts when the White House changes hands from one party to the other. Over the past 80 years, the incumbent party has lost the Presidency eight times. After an election when Democrats took over the White House from Republicans, the average 12-month gain for stocks was 20%. When Republicans seized power from Democrats, stocks took a 9% hit over the following 12 months.

There is some rationale behind the numbers, say market watchers. Democrats have generally done better when the economy is on the ropes, as it is this year, and when the economy is already in the tank, the chances for recovery during the coming year are a lot better. Statistics also show that long-term prospects for stocks are generally better when a Democrat is in the Oval Office. Over the past 50 years, returns on the S&P500 have been 5% higher under Democratic presidents than under Republicans.