11/03/2004: 
Breaking News
Do Elections Really Matter to the Economy?
from undisclosed source, courtesy of alert reader Max Power
Note: Names that might reveal the source of this article have been replaced with " * "
In the medium term, we believe the election does matter a great deal to investors, because U.S. presidents wield ample power in many spheres, ranging from fiscal policy to trade policy to industry regulation. The implications of a Bush versus a Kerry victory were discussed in two lengthy reports, dated * and * , which we co-authored with * senior economist *.
However, over the next few months, the election probably will matter less to the stock market than many observers believe, or than the feverish around-the-clock media coverage would suggest. We might get the proverbial "relief rally" if we have a terror-free presidential election that produces a winner in 24 hours rather than 24 days. But what we expect will mainly drive stock prices is earnings and PE ratios, not political uncertainty. For stock prices to rise materially over the next few months, investors must become more confident that economic expansion and earnings growth will continue in 2005.
As an example, think back to the eventful autumn of 2000. Election day was November 7 and the Supreme Court decided the outcome of the contest exactly five weeks later on the night of Tuesday, December 12. Over that period, stock prices declined 4.2%. However, stock prices did not recover when a winner was finally declared. They declined another 7.8% over the next six trading days, climbed through the end of January 2001 to a price nominally above the December 12 close, and then trended lower for two years.
What mattered most to investors in the autumn of 2000 was earnings-specifically, the cascade of fourth quarter earnings warnings, which foreshadowed a 20% decline in S&P 500 EPS in 2001. As The Wall Street Journal put it on November 12, 2000: "money managers appear to be far more focused on traditional worries than the unresolved state of the election."
