Politics are usually kind to the markets at this point in the electoral cycle, notes the FT’s John Authers in Tuesday’s Short View column. Since the war, the second half of the terms of US presidents has been far better than the first for stocks.
Large-cap stocks have made average annual gains of 18.6 per cent in the second half of presidential terms, compared with 5.9 per cent in the first two years, according to CFA Institute research. Presidents tend to get unpopular measures out of the way early and reap rewards later.
This cycle looks different. Last year, large-cap stocks gained less than 4 per cent. And 2008 could be different from most election years. It is a cliché that the markets hate nothing like uncertainty, but it is true. For the first time since 1952, neither the incumbent president nor the vice-president is running. That fosters uncertainty. Iowa’s results have intensified this.
Futures prices on the Iowa Electronic Markets suggest that Hillary Clinton’s chances of winning the Democratic nomination have halved since Iowa, while no Republican has as good as a 40 per cent chance of being nominated. This uncertainty contributed to stock markets’ bad start to the year.
New Hampshire will not relieve that uncertainty. None of the past four presidents won both Iowa and New Hampshire on their way to the White House. Instead, political doubts will probably act as a brake on equity returns until “Super Tuesday” early next month. Once 19 states choose delegates on that day, the issue should be settled for both parties.
If it is not, which is unlikely but conceivable, particularly for the Republicans, the markets would dislike that intensely.
Longer term, the greatest political risk for markets concerns the platform on which the candidates will run. Protectionism is in the air for both parties. If one of the nominees opts to run against free trade and globalisation, markets would hate it.
Watch this and other short view videos on FT.com.