Politics

Presidents Can Weather Market Meltdowns

The electoral problems start when equity losses turn into deeper slumps.

Down, not out.

Photographer: Drew Angerer/Getty Images

I'm no economist, so I'm not going to speculate about what the market meltdown over the past week means for the broader economy. In political terms, however, I can make a fairly safe recommendation: settle down. The market has tanked, but that -- by itself -- would do no harm to Trump's re-election chances.

The best example of this was the October 1987 market crash, in which the Dow lost over 20 percent of its value on "Black Monday," Oct. 19, after already having sunk far below its August peak. But equity losses didn't metastasize into a new overall economic slump; moderate growth continued through the 1988 election and well into George H.W. Bush's subsequent presidency. 

In the fall of 1987, though, a Bush presidency seemed quite unlikely. President Ronald Reagan's approval ratings had slumped for almost a year thanks to the Iran-Contra scandal and Senator Bob Dole's campaign for the GOP nomination began gaining traction.

Then, things started breaking Bush's way. After spending over a year at or under 50 percent approval, Reagan bounced back in the spring of 1988. Bush defeated Dole with relatively little difficulty, then defeated Democrat Michael Dukakis by nearly 8 percentage points -- with a massive 426-to-111 advantage in the Electoral College. Democrats picked up two House seats and one Senate seat to add to their majorities, with incumbents from both parties doing quite well. The crash was almost entirely forgotten. 

The dot-com crash of 2000 is a more complicated case to interpret, given both the extended length of the slump after the NASDAQ peak in March 2000, and the muddled results of the 2000 election. Still, it's fair to say that the early months of that market meltdown -- unaccompanied, through November 2000, by a recession -- didn't destroy the chances for the incumbent Democrats. 

The economy certainly does have a large influence on election results. It has a direct independent effect on presidential elections; it also has an indirect influence in both presidential and midterm elections by affecting the president's approval ratings, which have their own independent effect on those elections. Political scientists and others who have modeled elections have failed to reach consensus on exactly what in the economy changes the way people vote -- whether the best predictor is GDP growth, or income growth, or some other measure or mixture of measures. There's no proof that the stock market, by itself, has an important effect on elections, according to the quantitative studies that I know of.

That market shifts don't usually cause elections to swing doesn't mean they have no political effects at all. If volatility continues even another day, that's going to change the context in which congressional negotiators work as they approach the Feb. 8 deadline for funding the government to avoid a shutdown; no one is going to want to take responsibility for the government closing its doors while the markets are jittery. Interpretations of what's happening may also help one side or the other, making it difficult for politicians to support policies that are believed to make instability more likely going forward. But none of that will have any likely effect on what voters do in November. 

There's another reason to avoid drawing conclusions so early in an election year: A lot can happen in a few months, and voters have short memories. Just ask the 41st president of the United States. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Jonathan Bernstein at jbernstein62@bloomberg.net

    To contact the editor responsible for this story:
    Mike Nizza at mnizza3@bloomberg.net

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