Brawling Politicians: Bad for Your Portfolio?

November punch-ups aren’t great for investors.

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The love fest of the political convention season ended almost as soon as it began, when the first prime-time speaker, House Speaker John Boehner, set a Republican agenda that "starts with throwing out the politician who doesn't get it, and electing a new president who does." Since then, the two parties have launched into a brawl in which few rules apply, and flame-throwing and facile lies are standard gear.

[See Obama or Romney: Who's Better for Your Portfolio?]

The loser could well be you and your stock portfolio over the next two months. Much of the heated rhetoric will consist of Republican claims that President Obama mishandled the economy or Democrats saying how they believe Mitt Romney's programs would hurt people more.

In that kind of environment, investor confidence, already low, could sink further, say some analysts. Fund company T. Rowe Price said in its recently monthly report, "investors are focused on an apparently never-ending eurozone crisis and the campaign rhetoric emanating from both major political camps in the U.S."

Good-time elections now history. Historically, election years have been good times for investors. But over the past five elections, the Dow has fallen an average of 3.72 percent, and declined in four out of five September-to-November election day periods.

"The past several presidential elections, and politics in general, just keep getting more nasty," says Tyler Vernon, chief investment officer and co-founder of Biltmore Capital Advisors in Princeton, N.J. "It's not the way things were 25 years ago. Over the past few cycles, it has become much more negative. With Democrats and Republicans, the attack ads are questioning leadership more and more. It hurts investor confidence."

The perception that advertising is growing more negative is borne out by numerous studies. A recent one by the Wesleyan Media Project showed negative ads rising by a staggering amount—accounting for 70 percent of all presidential advertising in the early few months of this year, compared with just 9 percent in the 2008 period (although other factors, including fewer positive ads run by groups supporting Obama in this cycle, caused some of that shift.)

The big difference over the past four years is that so-called Super PACs have been freed from spending limits, or even listing contributors, and the Big Money advertising has been overwhelmingly negative, the Wesleyan study showed.

Politicians have always had a penchant for painting a negative picture of their opponents—some remember President Johnson's vivid black-and-white television ad showing a girl picking a flower as a nuclear mushroom cloud appeared behind her, a slap against his opponent Barry Goldwater's strident anti-Communism, or George H.W. Bush's ads accusing Massachusetts governor Michael Dukakis of furloughing a convicted murderer, Willie Horton, who embarked on a violent crime spree.

Those negative campaigns, though memorable, were not the norm. The LBJ ad was quickly withdrawn. And ads were often about "finding prosperity," rather than slamming the economy, Vernon says. From 1900 to 1988, the market scored nearly twice as many gains as losses in the September-through-November election span. The Dow gained in 15 of the years and declined in eight. The average September-to-election gain was 1.7 percent, exactly in line with the average gain for all two-month periods since 1900.

[See Paul Ryan's Pet Mutual Fund Project.]

Impact of financial crisis. The most recent election losses can be blamed at last partly on the crash of 2008, which was an election year event, although election years of the past also had some ugly Octobers, including the 1932 pre-election period in which stocks plunged 20 percent.

But the rising importance of the economy as an election factor and a surge in negative advertising are also playing a critical role, studies show. It's not just your imagination; things really have gotten uglier since the days of Ike and Adlai, or even since Bill Clinton and George Bush the First.