Analysts wonder where markets are headed - East Valley Tribune: Business

Analysts wonder where markets are headed

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Posted: Saturday, July 24, 2004 9:17 am | Updated: 5:55 pm, Thu Oct 6, 2011.

NEW YORK - The equity market's inexorable slide into the summer doldrums has many wondering what the next catalyst will be. Some analysts say the sideways pattern could continue straight through the presidential race.

Despite what you might think, however, Wall Street doesn't particularly care who wins. It just hates not knowing what will happen next.

"The market does not like uncertainty," said Sam Stovall, chief investment strategist for U.S. equity research at Standard & Poor's Corp. "I think investors are worried. ... It's a pretty close race."

Many investors, professional and novice alike, think another term for President Bush would be better for stocks. But the market has posted more significant gains under Democratic presidents. Going back to 1945, whenever a Democrat was in office, the Standard & Poor's 500 gained an average 10.7 percent per year, versus only 7.6 percent during Republican administrations.

But incumbents definitely held an edge during the same period. During the same time frame, whenever they have been re-elected, the markets rose an average 7.5 percent in the subsequent year. When a sitting president has lost, the market has declined an average 4.7 percent the following year.

"Investors don't like changing horses in midstream," Stovall said.

When it comes to investing, however, researchers with CFA Institute and Northern Illinois University say it's a mistake to be too preoccupied with politics. In a study released last month, they found very little evidence linking market performance with who's in the White House. Their findings show stock and bond returns have a far more significant relationship with the Federal Reserve's monetary policy.

"I would say the market is politically neutral," said Robert Johnson, senior vice president of CFA Institute, a non-profit group that certifies financial analysts. "But the market cheers pro-business policies ... keeping taxes low, tax cuts, keeping regulatory restraints low, the lowering of trade barriers, any kind of pro-investment policies ... and no political party has a monopoly on that."

The study, which examined election cycles back to 1926, also debunks a long-held theory that markets do better in times of political gridlock - when different parties control Congress and the White House. Looking at the nine presidential administrations between 1969 and 2000, the researchers found returns on the S&P 500 correlated much more closely with monetary policy. With the exception of the Carter presidency and the first Clinton administration, stocks performed better when rates were lower than in periods of rate tightening.

So now, with the Fed just starting to ratchet rates higher after a long period of historic lows, it makes sense for returns to be lower.

"There's no question the president and Congress have significant impact, but it's very simplistic to think 'Gosh, the economy isn't as good as it was four years ago, thus the president and Congress have done a bad job,'" Johnson said. "There are so many outside factors. The president could do everything right and the economy still may sputter along. On the other hand, Congress and the president can misstep many times, and the economy can perform wonderfully."

Professional money managers aren't convinced that the person who wins the presidential race will have much impact on the profitability of individual companies, either. In a recent survey by the Russell Investment Group, only one in four said the election would affect their investing strategy.

Uncertainty about the election adds to the market's lackluster trading, said Randy Lert, chief portfolio strategist with Russell, but it's not the only factor. There are worries about the strength of the economy, inflation, rising oil prices, Iraq and terrorism - none of which is likely to be resolved in the current quarter.

"I don't want to say it has zero effect. But if we saw an economy that was firing on all cylinders, we'd see a happier market regardless of what's going on with the election," Lert said. "There's a lot of stuff going on out there right now, which has resulted in a highly cautious attitude. The two conventions and the Olympics clearly are perceived as opportunities for terrorism ... so I think a lot of that stuff will need to play out."

And no matter who wins, many of the current concerns will remain, said Stovall, of S&P. They include decelerating corporate earnings, rising interest rates and a persistent worry that the upturn Wall Street recently experienced was merely a cyclical bull market within a secular - or long-term - bear market.

"These could all be very challenging factors for whomever is in power next year," Stovall said.

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