How will election affect markets?

October 30, 1992|By Andrew Leckey | Andrew Leckey,Tribune Media Services

First of all, you don't buy a stock or bond based on who is president of the United States. There are a great many more fundamental questions to ask than that when selecting any long-term investment. Despite that important point, however, movement of financial markets during the respective periods of Republican and Democratic administrations provides interesting historical perspective.

Since 1952, according to a study by Shearson Lehman Brothers, the stock market has performed about the same under Republicans as Democrats. The average annual rate of return has been 11.8 percent under Republicans, 11.2 percent under ** Democrats.

The bond market, on the other hand, has fared much more poorly under the Democrats than Republicans. Ten-year Treasuries have provided an 8 percent annual rate of return under Republicans, but a zero percent return under Democrats. There have been, of course, some extenuating circumstances during the Democratic terms, such as the last two years of the Lyndon Johnson administration in which the Vietnam War raged but taxes weren't raised.

In addition, the Jimmy Carter administration was hit hard with the oil price shock.

There also haven't been as many Democratic years to make it possible to draw up a truly equal comparison to the long run of Republicans in the White House. Nonetheless, the general logic that inflation and interest rates rise more under Democrats than Republicans is one reason why the bond markets have been hit hard as Bill Clinton's chances continued to improve in recent weeks.

"In terms of the financial markets, I believe the number of Democrats elected to Congress will be a more important factor than whether Clinton is elected," predicted Tom Gallagher, political analyst with Shearson Lehman Brothers. "I'd expect modest economic stimulation under a Clinton presidency, in which case lower interest rates will continue, though after the first year the Congress will likely start to set the agenda."

A moderate Clinton might eventually have to go with the flow of a more liberal Congress, and that would result in higher interest rates, he believes.

"The bond market is disturbed by the possibility of a Clinton administration energizing the economy," observed Steve Einhorn, chief portfolio strategist with Goldman Sachs. "However, the enormous budget deficit and Clinton's sensitivity to it should keep him from doing any significant economic stimulation."

Einhorn is bullish on both stocks and bonds as a better bet than cash. He predicts a 12 percent to 15 percent annual total return from the stock market, and a 10 percent to 12 percent annual total return from bonds.

"I believe the key factor historically has been the economic environment that a particular president encounters, with economic fundamentals most important in determining how the financial markets perform," said Robert Dederick, chief economist with the Northern Trust. "The general notion, however, is that after Democratic boom periods of high inflation the Republicans come in with restraint and slow growth."

The stock market is often a bit slow the year following an election, Dederick noted. It's true that the market soared the year after the 1988 presidential election and was also up after the 1984 election. However, the market went down the year that followed the 1980, 1976, 1972 and 1968 elections.

"The bond market has lately been anticipating a Clinton victory and expecting the worst," said Dederick. "Yet, with the economy this sluggish, it's more likely to receive a small economic stimulus since it's not vibrant enough yet to call for higher interest rates."

Investors should focus on the possible stock market winners if Clinton is elected, among them companies dealing with the infrastructure, health care and the environment, advised Gallagher. He recommends stock in Caterpillar Inc., Ingersoll-Rand, Birmingham Steel, Waste Management, Rollins Environmental Services and Browning-Ferris Industries.

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