In the last 50 years, every time an incumbent has run for re-election, the market has risen. In those eight elections, the S&P 500 has gained an average 13.6%, with positive returns each time. While history is no guarantee, you can only bet against history for so long. There is ample cause for rising markets in most election years. Most sitting Presidents do whatever it takes to get re-elected, and Obama is no exception.
In the three times the incumbent lost, the average gain was 16.5%. In the five times he won, the market gained an average 11.9%. Furthermore, the two best years (1980 and 1996) happened in situations which carry some persuasive parallels to today’s narrative – a time of economic malaise and a decade-long stock slump (1980), or a time of Republican reaction to an unpopular attempt to nationalize health care (1996).
Which will happen in 2012? It could be a win-win situation if either 1980 or 1996 comes up for a rerun.
Case #1: 2012 Will be Like 1980 – a Reagan-Style Republican Revolution
As the above chart shows, the S&P 500 rose 25.8% in 1980, and it rose even faster in the middle months (the political season). During the nominating conventions in July, the S&P gained 7.43%, and November rose over 13%. There was a heady string of eight consecutive rising months from April to November of 1980 with the S&P 500 gaining a total of 43% from March 27 to November 28 in Reagan’s election year.
The economic situation going into 1980 was much like today’s barren landscape – a depressing time of high unemployment, slow real growth in the economy, a flat stock market, and sky-high deficits as a percentage of GDP. The major difference between then and now is that we have low inflation and low interest rates now vs. double-digit inflation and interest rates in 1980.
In July 1979, President Carter gave his infamous “malaise” speech, sending stocks down and gold up. His defeatist attitude eventually doomed him, especially after a sunny Ronald Reagan emerged on stage right. Although there is no Reagan on the horizon, we certainly have our Carter clone. To date, President Obama has been blaming most of America’s hard times on George Bush and the Republican Congress.
Unfortunately, November 1980 proved the eye of an economic hurricane, a double-dip recession. A second, deeper recession came during Ronald Reagan’s first 18 months in office, 1981-82, after Fed Chairman Paul Volcker’s “quantitative strangling” choked money flows. Banks followed his lead: the Prime Rate reached a record-high 21.5% on December 19, 1980. Super-high rates lasted until August 1982 when Volcker quickly lowered the Discount Rate from 12.0% to 8.5%, fueling a rapid recovery.
While this postscript may sound downbeat, we don’t have to suffer a double-dip recession this time around. With low inflation today – and “Helicopter Ben” Bernanke running the Fed – we won’t see a repeat of Volcker-nomics. But if Republicans win the White House and maintain control of Congress, we could see massive spending cuts and a return to fiscal sanity, fueling a long, strong new bull market if those new Republicans can act better than their profligate predecessors behaved under George W. Bush.
Case #2: Obama Wins, but Republicans Control Congress (as in 1996)
In 1996, Bill Clinton won re-election handily, while the Republicans consolidated their gains in Congress, leading to some very healthy bi-partisan co-operation – including the “end of welfare as we know it” and a series of four balanced budgets from 1998 to 2001. It takes two Parties to tango. Bill Clinton was smart enough to know that all spending bills originate in the House, so he let a Republican-led Congress pave the way for unprecedented fiscal sanity – as long he and the other Democrats could share the credit for it.
There are some remarkable similarities between 1994 and 2010. In a mirror image of Obama’s first term, Clinton’s first term featured a controversial plan to nationalize healthcare and a revolt against that plan.
As you can see in the above chart, during Bill Clinton’s first term, the House changed from a 60% Democratic majority to a 53% Republican majority between 1992 and 1996. In the same four years, the Senate went from a 57% Democratic majority to a 55% Republican majority. In 2010, Republican gains in the House were even greater than in 1994 (+64 seats in 2010 vs. +54 seats in 1994), but the swing in the Senate was not so dramatic. The Democrats retained power in the Senate in 2010, but if the Republicans regain the Senate in 2012, there could be the same kind of dramatic cost-cutting and mega-bull market we saw in the late ‘90s.
If Obama is as smart in 2012 as Bill Clinton was in 1996 – i.e., if he smiles and takes credit for a reviving economy instead of blaming all of his problems on a Republican Congress – he could win in 2012. If so, he must learn to be a gracious winner by taking lessons from Mr. Clinton: Let the radical cost-cutters have their way. It will go against his every instinct, but he can become a national hero if he brokers a deal.
There are 33 Senate seats up for grabs in 2012, with 23 of those seats currently held by Democrats or those who vote with the Democrats. If the Republicans hold the House, hold their 10 Senate seats up for re-election, and win only four or five of the 23 Democratic-held Senate seats, they could gain a majority in both Houses of Congress, and we could see a rerun of the golden days of the late 1990s.
Stop me! I’m dreaming again!