Obama Stock Market’s Low Volatility Favors Incumbents
Swings (INDU) in U.S. stocks have shrunk to the lowest level in six years, an indicator that has most often coincided with incumbent parties keeping the presidency in data going back to 1900.
The Dow Jones Industrial Average has gained or lost 0.54 percent a day on average this year, the smallest fluctuations for an election year since George W. Bush defeated John Kerry in 2004, according to data compiled by Bloomberg. Daily changes have trailed the 112-year average of 0.75 percent in 13 of 17 instances when incumbents won, compared with six of 11 times the parties lost, the data show.
While volatility doesn’t predict winners, its decline shows less concern that prices will be whipsawed by economic news, a potential benefit for President Barack Obama. At the same time, the Dow’s 65 percent rally since he took office never pushed it above the record 14,164.53 reached in October 2007. No Democrat since World War II has held on to the White House with the Dow this far from its peak.
“The incumbent tends to get re-elected when the market is doing well,” James McDonald, chief investment strategist at Northern Trust Corp. (NTRS) in Chicago, said in a telephone interview. His firm manages $750 billion. “If the market has done well, that means the economy is doing well, that means the incumbent has a better chance.”
The Dow declined 0.1 percent last week to 13,093.16, bringing its 2012 gain to 7.2 percent and leaving the measure of 30 of America’s biggest companies 7.6 percent below the record high reached in October 2007. The Standard & Poor’s 500 Index advanced 0.2 percent as employers created more jobs than forecast. The S&P 500 rose 0.2 percent to 1,417.26 at 4 p.m. New York time today, and the Dow added 0.2 percent to 13,112.44.
Obama’s odds for re-election have risen and fallen with U.S. equities, climbing since June as a rebound in manufacturing and home sales sent the Dow up 8.2 percent, according to Intrade.com.
On average, the Dow has gained 9.3 percent in years before incumbent parties retain office and fallen 4.5 percent when they lost, data going back to 1900 show. Obama is leading Republican challenger Mitt Romney by 3 points heading into tomorrow’s contest, according to an Oct. 31-Nov. 3 Pew Research Center survey.
Stock volatility, while guaranteeing nothing politically, is a barometer for investor psychology, according to Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $47 billion.
Daily changes in the Dow reached 0.95 percent in the third year of Obama’s presidency, the fifth highest since the Great Depression, when S&P stripped the U.S. government of its AAA credit rating and concern grew that Europe would fail to contain its debt crisis. With swings of 1.5 percent in the third quarter last year, the S&P 500 fell 19 percent from April 29 to Oct. 3.
Fluctuations may have abated just in time for Obama. Incumbent parties have lost all four elections when daily changes averaged 0.94 percent or more in since 1900, according to data compiled by Bloomberg. It was above that level when John McCain lost in 2008, when Al Gore was defeated in 2000, when Franklin D. Roosevelt beat Herbert Hoover in 1932 and when Warren G. Harding prevailed over James M. Cox in 1920.
The last time daily changes were lower than this year was 2006, when they averaged 0.47 percent.
The Federal Reserve’s third round of bond purchases, forecasts for rising earnings and signs Europe’s debt crisis isn’t worsening helped calm markets in 2012. Average moves less than 0.75 percent a day preceded the election of George W. Bush in 2004, Bill Clinton in 1996 and Ronald Reagan in 1984. Jimmy Carter lost when swings were 0.76 percent in 1980, data compiled by Bloomberg show.
Obama defeated McCain after the bankruptcy of Lehman Brothers Holdings Inc. in 2008 spurred the biggest stock-market retreat in seven decades. The Dow average gained or lost an average of 1.63 percent a day that year, the most since 1933, data compiled by Bloomberg show. Clinton beat Bob Dole in 1996 when the Dow posted an average change of 0.58 percent.
Daily volatility in all 30 Dow companies declined this year from 2011, according to data compiled by Bloomberg. Seven of the 10 best-performing stocks in 2012 had swings fall by 0.4 percentage point or more. Hewlett-Packard Co. (HPQ) had the worst performance in 2012, dropping 47 percent, and its average daily changes of 1.5 percent this year were higher than the 29 other Dow stocks, data show.
Fluctuations in Bank of America Corp., which has led the Dow in 2012, slumped to 2 percent from 2.5 percent in 2011, the data show. Shares (BAC) of the second-biggest U.S. lender by assets have surged 77 percent as earnings exceeded analyst estimates and are forecast to jump 76 percent in 2013.
3M Co. (MMM), the manufacturer of products including Scotch tape and dental braces, had the biggest decrease in daily swings in 2012 among Dow stocks. Volatility dropped by half to 0.7 percent a day this year, as the shares rallied 8.9 percent, 1.7 percentage points more than the Dow.
Unlike Obama, who has enjoyed a 7.2 percent rally in the Dow this year, the last years of Bush presidencies in 1992 and 2008 were accompanied by a sputtering market. The average climbed 1.8 percent through the end of October before Clinton was elected and slid 30 percent before Republicans lost in 2008.
Exceptions to indicators such as volatility make them statistically meaningless and just as much evidence suggests Obama will be defeated, according to David Goerz, the chief investment officer at Highmark Capital Management Inc., which oversees about $17 billion of assets.
George H.W. Bush gave up the White House in 1992 following a year in which daily Dow swings were just 0.52 percent, the lowest in seven years. The incumbent party has lost on five other occasions when daily moves were below average: Gerald Ford in 1976, Hubert Humphrey in 1968, Richard Nixon in 1960, Adlai Stevenson in 1952 and William Taft in 1912.
While the Dow is in the midst of a four-year bull market, it hasn’t surpassed its record of 14,164.53 from five years ago, and that shortfall is inconsistent with previous Democrat victories. When Lyndon Johnson retained office in 1964 and Clinton won in 1996, the average had reached an all-time high within the previous month. Stevenson, Carter and Gore lost when the Dow was no closer than 6.4 percent to a record the week before the election.
Obama has overseen the slowest post-recession recovery since the Great Depression. The U.S. will expand 2 percent in 2013, below this year’s rate, according to the median estimate in a survey of 89 economists by Bloomberg. While the unemployment rate slipped to 7.9 percent last month from a 26- year-high of 10 percent in October 2009, no president has ever been re-elected when joblessness exceeded 6 percent.
Gains in stocks this year reflect investor optimism that Romney will take office and address the so-called fiscal cliff of more than $600 billion of tax increases and spending cuts that are set to kick in automatically next year, according to Philip Orlando, the New York-based chief equity strategist at Federated Investors Inc. (FII), which oversees about $364.1 billion
“There was an expectation that Governor Romney was going to win,” Orlando said in a telephone interview. “The fiscal cliff situation was going to be successfully diffused and we were going to see more pro-growth fiscal policies.”
Obama’s betting odds have fluctuated with the stock market. Since the S&P 500 reached a one-year low of 1,099.23 on Oct. 3, 2011, the price of contracts that pay if he wins at Dublin-based bookmaker Intrade climbed from $4.65 for a $10 wager to $6.14 in May. Investors today put the odds at 65.8 percent versus 34.2 percent for Romney.
The Oct. 31.-Nov. 3 survey by the Pew Research Center found Obama led Romney 48 percent to 45 percent, a gain for the president compared with the week before when the two were tied at 47 percent. An ABC News/Washington Post tracking poll conducted Oct. 28-31 had the race a dead heat, at 49 percent for each candidate.
Stocks may gain no matter who wins, if the polls and past elections are any guide. Closer presidential races generate bigger rallies after the victor is chosen, with the S&P 500 rallying an average of 5 percent by the end of the year when one candidate led by about 3 percentage points or fewer, Deutsche Bank AG wrote in a note Oct. 25.
A rally that size would put the S&P 500 at about 1,484 by the end of the year. That’s above the average of Wall Street strategists, who estimate the index will surpass its all-time high in 2013, as earnings expand 4.9 percent to a record $106.27 a share, data compiled by Bloomberg show.
In 28 presidential races since 1900, the Dow has gained 17 times between election day and the end of the year, according to data compiled by Bloomberg. The mean return is 1.6 percent.
The gain in U.S. stocks has come as earnings increased an average 23 percent for the past four years. Although profit growth was flat for the second quarter and less than 1 percent so far in the third, it is forecast to increase 6.4 percent in the last three months of the year. Earnings have helped keep the S&P 500 trading at a 15 percent discount to its five-decade average this year, data compiled by Bloomberg show.
John Carey, at Pioneer Investments, says equities have been gaining as investors bet policies will remain in place, helping companies keep earnings expanding and share prices rising.
“It’s uncertainty,” Carey, who helps oversee about $200 billion at Pioneer Investments in Boston, said in a telephone interview. “The market tends to favor the status quo and a continuation of the current situation so that it can focus on earnings and economic data.”
Year President Elected Party Dow Volatility Performance (in percent) (in percent) 2012 0.54 7.2 2008 Barack Obama D 1.43 -29.7 2004 George W. Bush R 0.54 -4.1 2000 George W. Bush R 1.00 -4.6 1996 Bill Clinton D 0.58 17.8 1992 Bill Clinton D 0.52 1.8 1988 George H.W. Bush R 0.83 10.8 1984 Ronald Reagan R 0.67 -4.1 1980 Ronald Reagan R 0.76 10.2 1976 Jimmy Carter D 0.65 13.2 1972 Richard Nixon R 0.47 7.3 1968 Richard Nixon R 0.46 5.2 1964 Lyndon Johnson D 0.30 14.4 1960 John Kennedy D 0.57 -14.6 1956 Dwight Eisenhower R 0.52 -1.8 1952 Dwight Eisenhower R 0.35 0.0 1948 Harry Truman D 0.48 3.9 1944 Franklin Roosevelt D 0.34 7.8 1940 Franklin Roosevelt D 0.75 -10.3 1936 Franklin Roosevelt D 0.73 22.9 1932 Franklin Roosevelt D 2.65 -20.5 1928 Herbert Hoover R 0.78 25.6 1924 Calvin Coolidge R 0.62 8.9 1920 Warren Harding R 0.95 -20.7 1916 Woodrow Wilson D 0.74 5.5 1912 Woodrow Wilson D 0.44 11.2 1908 William Taft R 0.81 41.1 1904 Theodore Roosevelt R 0.65 28.3 1900 William McKinley R 0.86 -10.2
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