Obama vs Romney : Who is the best for financial markets?

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09/11/2012 | 06:18 pm
The US presidential campaign is got to the heart with the beginning of the Republican Convention in Tampa, during which Mitt Romney has been officially invested as challenger of Barack Obama. Last week, also the Democratic convention has begun with the speech of Michelle Obama and finished with a hugs between Bill Clinton and Obama.
Barack Obama starts his campaign with the favor to be the President in office. Since 1945, only three presidents on eleven has not been reelected, the last one was G. Bush in 1992. But the uncertainty of US economy, the tensions in foreign policy, and especially the high unemployment rate (8.1% against 6.9% when he arrived) undermine Obama’s reelection.
According to the Economist Magazine, more than 60% of US voters believe their country to be on the wrong road. Three million more Americans are out of work than four years ago and the $5 trillion bigger on national debt. This situation have darken important achievements reached by Obama, as the epochal health care reform or the bailout of Detroit carmakers, and the dead of Osama Bin Laden.
On the other side, Mitt Romney’s campaign is focused on reversing Obama’s economic policies. As first target, Romney would eliminate Obama’s health care reform. In add he says that he would replace Ben Bernanke as chief of Federal Reserve (his mandate expires in 2014), criticizing Economic stimulus set up by the FED.
The Tea Party exponents, as Paul Ryan running mate for Republican, are pushing to tax cuts and to get the government out of business. For him, only the private sector has the economic muscle to create the millions of jobs needed.  

Which President financial markets prefer?

Since 1960, the S&P 500 index has gained more than 2430% in price appreciation, with annual return over than 6.3%. If we consider the index including dividends, the total return is 12700%, with annual equivalent return of 9.8%. In this period ten Presidents has been taken turns in office. Five of them were Democrats, for a total of 24 years, and five were Republicans for a total of 28 years.
If we consider only the price appreciation of the S&P500, without dividends, the financial markets prefer Democrat Presidents.
In fact, according our data, the S&P 500 rose in average over than 10% per year when Democrats were at White House. On the other hand, when Republicans were in office the index rose “only” 1.7% in average for year. This result is very influenced by two periods, the Clinton era and the period from 2001 and 2008, when George W. Bush was President. In this period the US president was confronted at "dotcom bubble", twin towers attack and the financial crisis. If we delete these periods from our analysis the spread is much reduced, 8% for Democrats and 5% for Republicans in average.
In the graphic below, it is possible to see the S&P500 since November 1992. In blue, the period when Democrats were in power, in red the period of George W. Bush as U.S. President.

In add we have studied the financial markets’ behavior seven month before the November's elections.  We have seen that the S&P rose in general before elections. This bullish trend is most important when we have a succession between Democrats and Republicans. Financial markets forecast the election of Republican President and for this reason the market became euphoric. The perfect example was before Regan’s election in November 1980. From April 1980 to the end of October, the S&P gained over than 25%. The euphoria for the Republican President continued during November (+9%).  

In conclusion, we can say that financial markets prefer Democrat Presidents during all period in office, supported also by the anticipation of the succession in favor of Republican President. 

Oscar Salza
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