Will there be an Obama bump? No, I don't mean that cutesy, fist-tapping thing the president-elect and the soon-to-be first lady sometimes do when they meet on stage at a rally. Rather, will the stock market take kindly to the presidency of Barack Obama? Well, at a bare minimum, investors might show immediate optimism about the prospect of an Obama administration. After six of the past seven presidential elections, according to Strategas Research, the Standard & Poor's 500 has risen between Election Day and the last day of the year, notching an average gain of 2.6 percent. Not bad for a quick boost.
But beyond that, it's tough to tell, given all the questions about the economy and what policies Obama and the new Congress might pursue. While the once frozen credit market is slowly picking up, for instance, America seems to be slipping into the worst downturn in perhaps a generation. Will the Obamacrats still push for higher taxes, or might they leave rates where they are and "go for growth" with the Mother of All Stimulus Packages, perhaps equal to or greater than the $700 billion Paulson plan? If so, will ginormous budget deficits spook bond investors, sending interest rates higher and offsetting any positive impact from the stimulus? Remains to be seen.
Steady stocks. Yet maybe that's overthinking things a bit. Truth is, Wall Street over the long term is amazingly impervious to what Washington does. Republicans and Democrats have been going at it since the 1850s. But the return on equities has been remarkably consistent no matter which party has held the White House. A recent analysis by Vanguard Group found that stocks have produced an average annual return of 8.97 percent during 16 Democratic presidential terms vs. 8.66 percent in 23 Republican terms.
Granted, the government is more intrusive and a whole lot bigger now than in the 1800s. And, more recently, the market has done better under Democrats than Republicans. Since 1948, the total return of the S&P 500 has averaged 15.6 percent with a Democrat in the Oval Office vs. 11.1 percent with a Republican, according to research firm Trend Macrolytics. Yet policies are more important than parties. Bill Clinton (free trader, capital-gains tax cuts, balanced budgets) and JFK (another tax cutter) could be considered Republicanesque in their policies. Richard Nixon (wage and price controls) and George H. W. Bush (tax hikes) were not. Flip those guys into the opposite columns, according to the firm, and you find that the market is up an average of 14.7 percent under the GOP and 10.5 percent under the Dems.
But money manager Eric Singer thinks that kind of analysis may miss a more fundamental trend. When it comes to how Wall Street feels about Washington, he says (to paraphrase Thomas Paine), "that government is best which governs least, and the market thinks so, too." Singer runs the Congressional Effect fund, which goes to cash when Congress is in session and moves back into the market when the politicos head out of town. That strategy, if followed for the past four decades, would have done about 1.5 percentage points a year better than just buying and holding the S&P 500. So maybe President Obama's first move should be to persuade Nancy Pelosi and Harry Reid to turn around and go home.