History shows market is due for a campaign rally
By Roy Bragg
Express-News Business Writer
Web Posted : 10/04/2003 12:00 AM
Like birds migrating south for the winter or animals stampeding before an earthquake, the stock market has an innate sense of danger and survival.
From riots in Malta to mobile home purchases in Mobile, thousands of financial decisions and geopolitical events can impact the market's performance.
But in the grand scheme of all things financial, nothing makes the market run for the hills like an American presidential campaign, a time of planned upheaval that affects the entire world.
Fiscal policies of every nation can live or die based on U.S. presidential campaign speculation. Voter polls here influence political decisions made in world capitals. Foreign markets can rise, fall or tread water based on what happens on Election Day.
In "The Presidential Election Cycle," a report written over the summer for investors, Vincent Collicchio of San Antonio-based investment firm U.S. Global Investors lays out his historical template for presidential terms.
It goes something like this: Two bad years, followed by one good year, followed by one great year.
"The correlation is overwhelming," said Christopher Holoman, a political scientist at Hilbert College in Hamburg, N.Y. "It's held up for 70 years. The first two years, the economy is down. The third year, they start taking steps to improve things and it gets better. By the fourth year, it's always up.
"Now we've gotten to the point where it's almost a self-fulfilling prophecy," he said. "Investors expect it to happen, so it does."
And it's been no different during George W. Bush's administration. After two years of a semi-conscious post-recession economic recovery, financial forces are gathering speed.
The Federal Reserve Board has lowered rates to all-time lows. The Bush administration and Republicans controlling Congress are keen on priming the economy. Hence a commitment to deficit spending and tax cuts this year.
As has been the case for 70 years, things are on schedule.
The S&P 500 has increased an average of 17.4 percent in the third year of the presidency, which is the year after mid-term congressional elections, Collicchio found. It's been that way 14 straight times since World War II.
The only loss in a pre-presidential year ?- which this is ?- was in 1931, during the Great Depression, when the Dow dropped 52.7 percent and the S&P lost 47.1 percent.
In the early 1970s, Richard Nixon's first term was marked by a steep inflation, so he took action.
"Nixon always felt that he lost" in 1960 to John F. Kennedy, said Allan Meltzer, a professor of political economy at Carnegie Mellon University, "because he felt the economy was weak and he couldn't convince Eisenhower to do anything about it."
Facing re-election during a slowdown in 1972, Meltzer said, Nixon took decisive steps. He instituted wage and price controls and devalued the dollar in order to juice the economy.
"In reality, presidents probably have less control over these things than one might guess," Meltzer said, "but (Nixon's actions are) probably the most blatant example of a president stepping in."
On the other hand, observers agree that the elder President Bush lost his re-election bid because of inaction. The common belief is that Bush lost because of a faltering economy. In fact, Collicchio says, the economy was out of recession in plenty of time for the election.
In 1991, Collicchio writes, the Dow Jones average rose 20.3 percent. The S&P was up 26.3 percent. The Nasdaq was up 56.8 percent. But voters perceived that Bush was doing nothing to help the recovery.
In that environment, even a minor misstep ?- such as Bush's embarrassing first encounter with a grocery store scanner ?- can be exaggerated.
Eventual winner Bill Clinton, fueled by the mantra ,"It's the economy, stupid," was able to make Bush look bad in voters' eyes.
"The first Bush expected things to turn around in time for the election, but it didn't," Collicchio said. "He was less attentive to focusing on domestic issues than his son has been."
Beyond those anomalies, healthy markets usually mark presidential election years. That, observers say, is because new presidents count on the public having a short memory.
"They're not blind," said Jim Glassman, economist with J.P. Morgan Chase. "They know that when they come into office, they have to bite the bullet and take the tough measures in the early years, hoping it will pay off by election time." This, Collicchio said, makes sense given the nature of politics.
"Just think of it philosophically," he said. "A first-term president wants to get re-elected, so in the first half of their terms, they deal with the difficult issues. They've got foreign policy problems. If they take military action, they do it in the first year of their terms. If they have any hard economic or policy choices, they do in the first half of their terms."
President Clinton didn't have to do much. He was benefiting from a boom economy and had high approval ratings, proving that voters care more about their wallets than anything else.
In President Bush's case, the 9-11 attacks came late in his first year, as did the war in Afghanistan. The invasion of Iraq, while it technically occurred in his third year, could be considered part of the War on Terror that began in his freshman year.
"I think President Bush has everything going his way," Glassman said. "The economic cycle is working out just about right for him. He's done some aggressive things to get things moving, and it shows."
In the dust following mid-term elections, the president and his handlers typically focus on the pocketbooks of the voting public, said Phil Cooley, Prasseo distinguished professor of Business Administration at Trinity University.
"President Bush is holding true to form," he said. "He had two bad first years, with 2000, 2001 and 2002 - the first time we've had three negative years in a row. The tech bubble burst, and he felt that impact."
Like other presidents, Bush began to think about his strategy for a second term.
"Now, when the president starts thinking about re-election, he does two things: He has a fiscal stimulus package, such as cutting taxes, and he makes sure interest rates are low," Collicchio said.
Interest rates are low and have been low for months. While Bush doesn't directly control the actions of the Federal Reserve, the board works in concert with the president to ensure economic harmony.
"Right now, Alan Greenspan is being very accommodative because of the market," Cooley said. "But President Bush gets the benefit of low interest rates, which positively affect the stock market and the economy as a whole."
Other aspects of the economy weren't playing ball, however. While there was recovery, it was moving at glacial speeds. The economic recovery was sluggish, so Bush pushed tax cuts through Congress in 2001 and fast-forwarded many of them to take place this year, Holoman of Hilbert College said. He got money to help states pay their bills, and the tax cuts this year will help business investment.
The early returns show it might be working. Economic growth, Glassman said, is projected at 5 or 6 percent.
"I've been told by an economist that if the population has a growth in their net income of at least 2 percent in the year of the election," Collicchio said, "the president is re-elected 90 percent of the time."
The only economic indicator that could hurt Bush, economists and political scientists say, is the jobless rate, which is higher now than it was during the recession.
"There hasn't been enough growth to generate any hiring," Glassman said.
But employment is poised for recovery, Glassman said. As business begins to build steam, manufacturers will begin hiring workers.
Joblessness, he said, is a lagging indicator, meaning that it rises six months after other indicators rise. If that timing holds true, people will be going back to work and jobless figures will be plummeting as Bush begins his campaign in earnest.
And if the situation in Iraq is under control by the middle of next year, Bush will be sitting pretty, with a healthy economy, a quiet Iraq and a Democratic field of candidates beating each other senseless on the sidelines. The outlook for investors, Collicchio believes, is good.
"It's a good time to dive in," he said. With the dollar weak, investors should target companies that sell goods overseas, because a weak dollar makes them more competitive with foreign manufacturers.
That also will follow the pattern, Holoman said.
"There's always a natural enthusiasm that builds up around presidential campaigns," he said. "People on both sides are promising change, and that makes investors feel good about stuff."
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10/03/2003
