With the presidential election campaign now well under way, investors should be alert to how the political campaign may affect their savings and investments. Based on history, there is a direct correlation between the four-year US election cycle and what happens in stock and bond markets, experts say.
The period from Labor Day to the November election, for example, tends to be good for financial markets. But the first year for a new president or the fifth year for a second-term incumbent tends to be challenging - often down for stocks.
Some observers say these patterns reflect incumbent presidents' efforts to have the economy strong as an election approaches, and to get bad economic news - such as recessions - out of the way early in their terms.
Whatever the reasons, based on past cycles, 1997 "will probably be a bumpy year" at best, says Rao Chalasani, chief investment strategist at Everen Securities Inc. in Chicago.
Here are some frequently asked questions regarding the four-year election cycle:
How do stocks do in election years?
In general, they do well. In the past 50 years, "only one presidential election year has seen the Standard & Poor's 500 stock index lose ground between Jan. 1 and election day," says James Stack, who publishes InvesTech, a market report based in Whitefish, Mont. That year was 1960, when Democrat John F. Kennedy was elected.
The S&P 500 closed Friday at 655.68, up from 620.73 on Tuesday, Jan. 2.
Do any indicators tend to forecast the election outcomes?
Two gauges are worth watching, some analysts say. Mr. Stack, looking at data going back to 1900, says that if the Dow Jones industrial average falls 10 percent or more between Jan. 1 and election day, the incumbent party tends to lose the White House, as in 1920, 1932, and 1960.
The other indicator to watch is consumer confidence. Since the Conference Board in New York began tracking consumer confidence in 1969, no incumbent has been thrown out if the index rose in the 12 months preceding the election, Stack says. In the current cycle, consumer confidence is up.
Are there patterns for landslides?
Each of seven landslide victories this century (with incumbents winning more than 80 percent of the electoral vote) was preceded by two recession-free years.
Are election years the best ones for the stock market?
No, Stack says. The best years, in terms of market gains, have been the third years in the four-year election cycle, the year before the election. Election years have been stable years, with moderate gains, he says.
What direction do interest rates take after a vote?
Generally up, says Stack. Only once in the past 50 years have short-term rates fallen in the year after an election.
What does that mean for investors?
"There's an old saying: Buy stocks in the third and fourth year [of the four-year cycle] and T-bills [Treasury bills] the first and second years of the cycle," says Arnold Kaufman, editor of "The Outlook," a financial report published by Standard & Poor's Corp. There will still be good individual stock plays, he adds.
Do small-company stocks do better under Republicans?
Not according to a recent study by Liberty Financial Companies. It found that small stocks climbed more under Democratic presidents (an average of 17 percent annually) than under Republicans (10 percent a year) since 1937. The GOP expresses much support for small business, but is seen as good for big-company stocks, while the Democratic focus on reducing unemployment tends to help small business, analysts say.
What other stock sectors might do best after a Clinton reelection?
High-tech companies, bank and financial companies, education-related firms, and consumer stocks might do well, some experts say, citing the administration's interest in middle-class consumers, education, and information technology.
But tobacco, health-care, drug, and textile stocks might take hits, given regulatory and trade reforms sought by Clinton.
And under Dole?
Defense stocks might be bolstered by Dole's plan to upgrade military readiness. Tobacco firms would likely do better than under Clinton.
Some traders fret that bonds would take a hit under Dole's plan to cut taxes. (If the budget deficit rises, so too may interest rates.) But the tax cuts may help consumer-goods producers, as families have more income to spend, Mr. Chalasani says. Investors would also profit from a Dole capital-gains tax cut.
Would the stock market do better under a Republican White House than under a Democratic one?
Not necessarily, despite the GOP's pro-business tradition. According to data going back to 1900, the Dow's highest annual gains occurred with a Democratic president and Congress. But past results may no longer be relevant, says Larry Wachtel, an analyst at Prudential Securities Inc. in New York. Unlike past years, today's lawmakers have fewer extra tax dollars to spend on large budget programs, and thus rev up the economy. The main factors influencing stocks and bonds, he adds, are still the underlying fundamentals like interest rates.