By Jonnelle Marte
Republicans will descend on Tampa this week to debate the gold standard, fiscal policy and health care reform. And if history is any guide, they might also boost the stock market—at least temporarily.
In the 16 presidential election years since 1948, the S&P 500-stock index has risen during 11 Republican conventions, as measured from the start to the end of the convention, according to a report by S&P Capital IQ. In contrast, stocks notched gains during only seven Democratic conventions.
When markets reacted favorably during one convention, they tended to drop during the opposing party’s convention. That suggests that if markets rise this week while Republicans are meeting, the odds are, stocks might drop when Democrats hold their convention in Charlotte, N.C., Sept. 3 to 6, says Sam Stovall, chief equity strategist for S&P Capital IQ.
What exactly is swaying markets one way or the other when politicians are convening? Investors could be making moves based on how they expect that party to impact markets and the economy if elected to office. Republicans are typically associated with laissez-faire and pro-business approaches to policy, which might appeal to investors; Democrats tend to be associated with policies that favor a bigger role for government and higher taxes, which could be perceived as bad for investors and corporations, says Stovall.
Investors could also be reacting to specific proposals unveiled at conventions, and this year, they’ll have no shortage of material to react to—some of it extreme. For instance, some Republicans are expected to call for the party to consider a return to the gold standard, more than 40 years after the dollar’s link to gold was severed, the Financial Times reports. Market volatility could increase in the coming weeks as investors watch how politicians propose dealing with issues like health care reform and the fiscal cliff, the combination of spending cuts and expiring tax breaks that threaten to send the U.S. into recession, says Richard Weeks, managing director at HighTower Advisors in Vienna, Va. “This is the beginning of the temperature being turned up on the discussion of fiscal issues,” says Weeks.
To be sure, investing pros say there are plenty of other forces moving markets during presidential conventions, including economic reports or other important meetings. Next week’s convention, for instance, could be overshadowed by Federal Reserve Chairman Ben Bernanke’s speech at the annual economic symposium in Jackson Hole, Wyo., on Friday, which investors will watch for hints of future Fed action, advisers say. And most retail investors are better off not trying to time market moves based on headlines, says Weeks: “I don’t know that being reactive is going to pay off.”
Still, despite the positive tilt on market performance during Republican conventions, separate data shows stocks and the economy actually tend to perform better when a Democratic president is in office. Since 1900, the S&P 500 gained an average of 8.4% annually during all the years the U.S. had a Democratic president, compared with an average 5.3% gain for Republican presidents. Economic growth was also more robust, with GDP growing 3.7% annually under Democratic administrations, compared with 2.6% for Republicans. And corporate earnings grew by an average 16.6% a year, compared with 4.2% under Republican administrations. “So while one might say Democrats are the ‘tax and spend’ party, the important part of that equation is the ‘spend,’” says Stovall. “When you spend, that usually improves the economy and it improves corporate earnings.”