Put no stock in ballot box

PUBLISHED : Monday, 14 May, 2012, 12:00am
UPDATED : Monday, 14 May, 2012, 12:00am


This is a big year for elections: France and Greece have just held polls yielding dramatic results, the United States will have presidential and legislative elections, and there are general elections coming in Egypt, Iceland and Mexico. Even polls-challenged Hong Kong had a small election and is due for a bigger legislative vote later.

Linking these events are claims that elections produce instability, with incumbents saying that change threatens markets and economic development.

The hapless chief executive candidate, Henry Tang Ying-yen, proposed that the local economy was safer in his hands, as an experienced government member, than the untested Leung Chun-ying. Sadly for him, he appeared anything but a safe pair of hands.

Nicolas Sarkozy also made this argument during his campaign in France and was ignored by most voters. The global markets became anxious by the election of left-wing Francois Hollande as president, as share prices dropped. Significantly, they did not in France.

There is a common perception that left-wing election victories are bad for markets. Unfortunately for those who make this point, the lines between left and right in politics have become seriously blurred.

In Britain, the election of a Labour government in 1997 caused the predictable rumble over how bad it would be for the markets. But Tony Blair's administration turned out to be very business-friendly, arguably as much as any Conservative government.

The US stock market has historically performed better under Democratic presidents than Republican, according to the Stock Trader's Almanac, even though Democrats are portrayed as a left-wing party heavy on taxes and regulations, while the right-wing Republicans present themselves as the pro-business party.

The most striking link between elections and US markets is how they trade relative to a president's term in office. Ned Davis Research shows that stock markets rise on average by 5 per cent in a president's first year in office, 4 per cent in the second year, 12 per cent in the third, and 8 per cent in the fourth. Averages don't tell you everything, but the overwhelming evidence is that the second half of a presidential cycle is the time to buy stocks, regardless of the political complexion of the president.

Markets are always reacting to fresh information. But the most market-sensitive news generally comes from the fiscal and economic spheres, not from political events.

So why the obsessive linkage between stock markets and elections? Many stock pundits see themselves as shrewd judges of the political environment. Election results are dramatic and newsy, and give observers an obvious reference point to explain market moves. And finally, people with money tend to be on the right-wing side of the political equation and thus avidly promote the idea that only right-wingers can be good for investors.

But the data does not back the view. Consider the case of Franklin Delano Roosevelt. Ideologically speaking, it is hard to find an American president more left wing. He implemented the wildly socialistic (by US standards) New Deal programme of heavy government spending, higher taxes on the rich, unemployment relief and tighter regulations on banks. And yet, in 1936, the year he was elected for a second term, the US stock market rose 25 per cent.

However, radically left-wing governments can be bad for business and markets, and there are countless examples of markets plunging as leftists win elections.

This was the case with the 2002 presidential election of Luiz Inacio Lula da Silva in Brazil, and with Ollanta Humala's election victory in Peru last year.

The left-wingers both sent markets tumbling at the time of their poll wins. The election of Britain's first Labour government in 1924 had a similar effect.

However, markets are rational and quickly resume a focus on fundamentals, which means looking at earnings and real corporate performance.

In this sense, markets are objective, but their objectivity is often shrouded in excitable initial response to events. This is the point at which shrewd investors stand to make money.