Please note the following change since this document
was originally published.
Effective May 1, 2013, J.A. Glynn & Co. changed
our corporate structure to better support our longterm growth plans. The investment advisory
services previously provided under the name JAG
Advisors are now provided by JAG Capital
Management LLC, an SEC-registered investment
advisor.
October 2, 2012
Presidential Elections and Stocks
Norm Conley, CEO/CIO and Mike Buck, CFA, Quantitative Analyst
With the onset of fall, investors are now shifting their focus to the upcoming U.S. Presidential election on November
6. At the time of this writing, most polls show Governor Mitt Romney as a slight underdog to President Obama. If
history is any guide, two things are for certain: (1) No matter who wins, very close to 50% of us will be frustrated
with the election’s outcome on the evening of November 6; and (2) After withstanding several weeks of political ads,
talk show bloviating, online blog-fights, direct mail solicitations, and incessant evening robot phone calls, approximately 100% of us will be relieved when the election is finally over.
As the chart above shows, our Congressional leaders are currently more divided along party lines than they have
been in decades. Anecdotally, we are seeing broad evidence that this “bi-polar” political tone is not restricted to
Congress. We have had a surprising number of conversations recently with clients and fellow investment professionals (of various party affiliations) in which they relate that they are raising extra cash, delaying long-term investment decisions, and/or otherwise altering their asset allocation policies “until after the election.” These individuals
clearly believe that a presidential election victory by one party or the other will dramatically shift the investment environment over the near- to intermediate-term, so they are acting accordingly. Democratic-leaning investors are
fearful of a potential Romney upset, while Republicans are deeply concerned that the Obama regime will continue
for four more years.
While there is no arguing the fact that the office of the President is extremely important to our nation, we do not
believe that the President’s party affiliation is a reliable leading indicator for the trajectory of the financial markets.
What follows is our attempt to handicap the likely outcome of the 2012 presidential race and provide some historical
context to the U.S. equity market relative to presidential politics.
Nothing in this document is intended as an offer or a recommendation to purchase or sell securities. Please see the last page for additional disclosures.
October 2, 2012
Handicapping the 2012 Election
Exhibits 1 and 2 contain a variety of data on the results of presidential elections beginning with the election of 1940.
We chose 1940 as a starting point because this was the first campaign for President that featured national polling.
The orange cells in the table mark elections in which the incumbent party retained the presidency. Blue cells identify
a switch from a Republican to a Democrat President, while red cells identify a switch from a Democrat to a Republican. The Net Approval column shows a 3 month moving average of the difference between percent Approve and
percent Disapprove from polling data. Please note that the polling data addresses the incumbent President, whether or not that person is running for reelection. As we will see, these numbers are a reliable guide as to the popularity of the incumbent’s party, which is how we are using them.
The Net Approval column yields some important insights. This number may be one of the most important indicators
of a candidate’s electoral prospects. In the 18 elections since 1940, the incumbent party has lost the presidency 8
times. In 5 of those 8 losses, the incumbent’s net approval in the October just before the election was significantly
negative. The exceptions to this were the shift years of
1960, 1976 and 2000, when the incumbent party lost despite positive approval ratings. But even in those cases,
the elections were very close and could have gone either
way. Only one candidate, Harry Truman, was able to
overcome negative approval ratings to win the presidential race, a result that shocked headline writers in 1948.
As reflected in the exhibits, President Obama’s latest net
approval margin is a slim but positive 4 points, combined
with an unemployment rate of 8.1%. These numbers are
similar to the numbers President Ford had in his 1976
contest with Jimmy Carter. Of course Ford ultimately lost
that race, but Carter’s 57 vote margin in the Electoral College made it the third-closest election behind George W.
Bush’s narrow victories in 2000 and 2004. The point is that despite the drag from Watergate and his connection to
President Nixon, Ford’s positive approval rating kept the race close.
In the 1992 Bush/Clinton race, President Bush faced an unemployment rate of 7.3% - significantly lower than President Obama’s – but Bush’s negative approval numbers sealed his fate. President Clinton won easily, and went on to
serve two terms as the nation’s chief executive.
Turning to the 2012 election, we think it is highly significant that President Obama retains a narrowly positive approval rating. If his approval numbers turn negative (which at this point would constitute a true “October Surprise”),
the odds of his re-election would plummet. As it is, the positive approval number offsets much of the drag from continued high unemployment and persistent economic problems, leaving him with a small but meaningful edge over
Governor Romney.
Nothing in this document is intended as an offer or a recommendation to purchase or sell securities. Please see the last page for additional disclosures.
October 2, 2012
Exhibit 1:
Incumbent
Election of
Party
Dem
Rep
Net Approval Unemployment in
Electoral
Electoral
3mon Avg in Oct
Aug Prior to
Votes Dem Votes Rep
Prior to Election
Election
1940
D
FDR
Wilkie
449
82
22
14.6
1944
D
FDR
Dewey
432
99
45
1.2
1948
D
Truman
Dewey
303
189
-7
3.7
1952
D
Stevenson
Eisenhower
89
442
-28
3.0
1956
R
Stevenson
Eisenhower
73
457
49
3.9
1960
R
Kennedy
Nixon
303
219
33
6.1
1964
D
Johnson
Goldwater
486
52
59
5.1
1968
D
Humphrey Nixon
191
301
-12
3.4
1972
R
McGovern
Nixon
17
520
24
5.6
1976
R
Carter
Ford
297
240
5
7.7
1980
D
Carter
Reagan
49
489
-20
7.5
1984
R
Mondale
Reagan
13
525
20
7.4
1988
R
Dukakis
Bush I
111
426
15
5.4
1992
R
Clinton
Bush I
370
168
-18
7.3
1996
D
Clinton
Dole
379
159
26
5.2
2000
D
Gore
Bush II
266
271
24
3.9
2004
R
Kerry
Bush II
251
286
8
5.5
2008
R
Obama
McCain
365
173
-45
6.5
2012
D
Obama
Romney
4
8.1
Table 1 key: Orange cells indicate incumbent party retained presidency, blue cells indicate switch from
Republican to Democrat, red cells indicate swith from Democrat to Republican
Source: Approval Ratings - University of Connnecticut Roper Center, Election results - U.S. Electoral College
Nothing in this document is intended as an offer or a recommendation to purchase or sell securities. Please see the last page for additional disclosures.
October 2, 2012
Exhibit 2:
Presidential Approval - Disapproval Rating - 3mon MA
100
Source: Roper Center, JAG Advisors
Red Diamonds Show Rating
Just Prior To Election
80
60
40
20
0
Oct-92
-18
Oct-68
-12
Nothing in this document is intended as an offer or a recommendation to purchase or sell securities. Please see the last page for additional disclosures.
Obama, D
Bush II, R
Oct-08
-45
Clinton, D
Reagan, Bush I, R
Oct-80
-20
Nixon, Ford, R
-80
Eisenhower, R
-60
FDR, Truman, D
-40
Kennedy, Johnson, D
Oct-52
-28
Carter, D
-20
October 2, 2012
At the InTrade website (www.intrade.com), individuals can wager real money on the outcome of certain events,
including political elections. Some political observers believe that InTrade’s data has more predictive value than
traditional polling services. Although Romney & Obama have been running neck-in-neck in most national polls
over the past few months, Intrade’s so-called “real-money prediction market” shows President Obama with a commanding lead. As Exhibit 3 shows, the InTrade market currently gives President Obama a better than 73% chance
of winning in November, up 20 points from June levels.
Exhibit 3:
Stock Prices and the Presidential Election Cycle
As we wrote in our introductory paragraph, roughly 50% of Americans will be disappointed with the outcome of
the presidential election. According to our data, it appears that GOP voters currently have the best odds of feeling
let down on Election Day. Since we are investment managers rather than legislators or political scientists, we are
primarily concerned with the investment implications of the election. More pointedly: should investors make significant changes to their investment portfolios if President is Obama is re-elected? For that matter, would it make
sense for investor to re-orient their strategy if Romney pulls off an upset? We think not, on both counts.
Nothing in this document is intended as an offer or a recommendation to purchase or sell securities. Please see the last page for additional disclosures.
October 2, 2012
Exhibit 4:
FDR
D
37.3%
0.8%
45.7%
41.5%
185.6%
FDR
D
-27.6%
17.3%
2.2%
-8.2%
-20.4%
FDR
D
-15.7%
-2.2%
27.7%
11.1%
16.9%
Truman
D
33.8%
-19.6%
-0.7%
6.9%
14.2%
Truman
D
7.0%
27.0%
18.0%
11.4%
78.6%
Eisenhower
R
4.9%
37.4%
38.9%
9.3%
118.8%
Eisenhower
R
-9.0%
27.3%
14.0%
-5.3%
25.2%
Kennedy
D
31.6%
-16.0%
33.7%
16.9%
72.6%
Johnson
D
10.4%
-13.5%
18.0%
8.6%
22.4%
Nixon
R
-8.1%
-16.0%
12.8%
17.9%
2.7%
Nixon
R
-7.3%
-36.4%
17.2%
14.1%
-21.3%
Carter
D
-11.9%
-2.2%
2.7%
17.2%
3.7%
Reagan
R
-8.8%
10.6%
24.3%
2.2%
28.1%
Reagan
R
15.8%
31.1%
2.0%
10.0%
70.4%
Bush I
R
20.9%
-13.0%
29.7%
6.5%
45.4%
Clinton
D
11.9%
1.2%
23.0%
20.5%
67.8%
Clinton
D
29.4%
20.2%
22.5%
2.6%
95.5%
Bush II
R
-26.7%
-16.8%
18.4%
6.0%
-23.4%
Bush II
R
4.2%
14.8%
10.7%
-38.3%
-18.4%
Obama (to date) D
10.0%
15.2%
4.4%
14.9%
52.0%
Avg. Dem
D
8.5%
1.5%
17.1%
12.4%
44.9%
Avg. Rep
R
-0.9%
-1.4%
12.7%
-1.3%
8.6%
Avg. All
3.9%
0.1%
15.0%
5.7%
26.3%
Median
7.0%
0.8%
18.0%
9.3%
25.2%
Best
37.3%
37.4%
45.7%
41.5%
185.6%
Worst
-27.6%
-36.4%
-27.0%
-38.3%
-48.0%
% Years > 0
61.9%
52.4%
90.5%
81.0%
76.2%
Note that years in this table begin in November and end the following October to track
the election cycle. Performance is based on S&P 500 real total returns.
Source: JAG Advisors
Nothing in this document is intended as an offer or a recommendation to purchase or sell securities. Please see the last page for additional disclosures.
October 2, 2012
Exhibit 4 shows inflation-adjusted total returns for the S&P 500 broken down by year within the election cycle and
by party controlling the White House. Note that for the purposes of this table, our years begin in November and
end the following October. The data for this analysis begins with the Hoover election in November 1928 and continues through current day.
Although it may come as a surprise to some, stocks have outperformed when a Democrat occupies the White
House (average real returns of 44.9% versus 8.6%). Before our Democratic friends get too excited, however, we
should point out that a huge proportion of this performance gap can be explained by the unique time periods involved. Our table begins with the Hoover administration, which endured huge stock market losses in years 2, 3,
and 4 as the Great Depression unfolded. Franklin Roosevelt had the good fortune to be elected soon after stocks
made a multi-generational low in June 1932. This was fortuitous timing by FDR, as stocks rose 185.6% during his
first term. On the other hand, George W. Bush was elected during the technology crash in 2000, and his presidency went on to encompass the banking crisis in 2008 and the worst recession of post-war era. Moving forward,
President Obama’s first term began within 60 days of the March 2009 bottom for the S&P 500. Timing is everything! For example, if we were to reframe the period of analysis to begin with Truman’s second term in 1948 and
end in 2000 as President Clinton was leaving office, the difference in stock performance between parties still favors the Democrats, but by a smaller margin (53.0% to 32.1%). Indeed, presidential election data can be (and has
been) tortured to “confess” whatever partisan conclusion one wishes to support.
We are highly skeptical that the President’s party affiliation has any meaningful impact on stock market returns in
any given year. Any apparent relationship between presidential party affiliation and stock performance is probably a good example of the classic statistical trap known as “correlation without causation.”
The Presidential Cycle and the Stock Market
The most significant take away from the data in Exhibit 5 is the behavior of stock prices tied to the presidential election cycle. Note, first of all, that the average stock market returns during years 3 and 4 of the presidential terms are
much more positive than those of years 1 and 2. This makes sense if one considers that Presidents usually push for
their biggest legislative changes during their first two years in office. To paraphrase money manager Ken Fisher’s
comments on the subject, legislative changes always involve a redistribution of wealth. Note here that wealth redistributions can result in transferring wealth away from or to the so-called “1%” (or any socioeconomic class). The
direction does not matter when we think about redistributions of wealth; collectively they cause change. Change is
often painful – for individuals as well as economic systems, markets, and institutions of various stripes. So stocks
are more likely to experience mediocre returns during the first half of a presidential term, when recent victory at
the polls provides Presidents with a “mandate” for change. On the other hand, by the time a President reaches
years 3 and 4, he is typically less willing (or able) to push through big changes. Less change equates to less wealth
redistribution, which leads to less pain. Markets react positively to a “less change” environment positively, and
have tended to outperform during the back half of presidential terms.
Nothing in this document is intended as an offer or a recommendation to purchase or sell securities. Please see the last page for additional disclosures.
October 2, 2012
Exhibit 5:
Don’t Forget Congress
Drilling down a bit further, the following exhibits detail a breakdown showing which party controlled the White
House and each house of Congress since 1928. Perhaps the most striking thing revealed by this information is the
extent to which Democrats dominated the federal government during the 20 th century. Exactly 2/3rds of the time
(56 of the 84 years) between 1928 and 2012, the Democrats controlled both houses of Congress. Over this same interval, Republicans controlled both houses in 20 of 84 years. The parties split control of Congress over the remaining
8 years. The Republicans have done better at the presidential level, but even here Democrats have the edge, holding the presidency for 11 terms versus 10 for the GOP.
So far, the GOP appears poised to retain its majority in the House of Representatives. In the Senate, several tight
races could result in a shift to a GOP majority, but they are still too close to call. However it plays out, it appears likely that a re-elected President Obama would preside over at least one Republican majority in Congress (i.e. Party Control will be “DDR” or “DRR”). Note from the chart that the most market-friendly Party Control combinations have
been DRR, RRD, and DDR. As aggravating, frustrating, and infuriating as partisan politics can be to watch, the data
show that financial markets seem to prefer some degree of partisan gridlock in our legislative process.
Nothing in this document is intended as an offer or a recommendation to purchase or sell securities. Please see the last page for additional disclosures.
October 2, 2012
Exhibit 6:
PartyControl*
DDD
DDR
DRR
RDD
RRD
RRR
# of Years: Nov-1928
to Oct-2012
34
2
8
22
6
12
% of Time
40.5%
2.3%
9.5%
26.2%
7.1%
14.3%
S&P 500 Real Total
Returns
8.5%
10.0%
15.1%
2.5%
11.7%
-3.1%
*Party control shows who holds President/Senate/House
Exhibit 7:
Nothing in this document is intended as an offer or a recommendation to purchase or sell securities. Please see the last page for additional disclosures.
October 2, 2012
Exhibit 8:
Conclusion
Some important dates to mark on your calendar:
Date
Event
10/1/2012
Fiscal Year 2013 Begins
10/5/2012
September Non-Farm Payroll Report
10/10/2012
Congress reconvenes
10/24/2012
FOMC Meeting
10/26/2012
Q3-2012 GDP Estimate
11/2/2012
October Non-Farm Payroll Report
11/6/2012
Election Day
11/13/2012
12/7/2012
Lame Duck Congress Begins
November Non-Farm Payroll Report
12/12/2012
FOMC Meeting
12/14/2012
Congress Scheduled to Adjourn
12/31/2012
First Round of Fiscal Provisions Expire
1/2/2013
Second Round of Fiscal Provisions Expire
1/4/2013
114th Congress Begins
Nothing in this document is intended as an offer or a recommendation to purchase or sell securities. Please see the last page for additional disclosures.
October 2, 2012
Conclusion
Regardless of who wins in November, we expect tough political fights to continue in Washington long past the
election. Fundamental disagreements over how to address serious economic challenges in a highly polarized political atmosphere virtually guarantee rancor and brinksmanship over conciliation and compromise.
We think financial markets will be much more sensitive to U.S. economic statistics and corporate earnings outlooks
then they will to the election results this November. In our opinion, equity valuations remain undemanding, so any
improvement in underlying data and corporate performance should continue to be supportive to stock price action.
Meanwhile, for investors who find themselves inclined to allow election coverage to influence their investment
policies, we respectfully suggest the vigorous use of the “mute button.”
Norm Conley
CEO & CIO
Mike Buck, CFA
Quantitative Analyst
This report was prepared by J.A. Glynn & Co., a registered broker-dealer and member FINRA/SIPC, and JAG Advisors, an investment adviser registered under
the Investment Advisers Act of 1940, as amended. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. The information in this report is given as of the date indicated. We assume no obligation to update this information, or to advise on further developments relating to issuer(s) discussed in this report. Additional information is available upon request.
The information contained in this document is prepared for general circulation and is circulated for general information only. It does not address specific
investment objectives, or the financial situation and the particular needs of any recipient. These materials do not contain, and are not intended to provide,
information reasonably sufficient upon which to base an investment decision and should not be used for such purposes. Investors should seek financial
advice regarding the appropriateness of investing in any securities discussed in this document. This document does not constitute an offer, or an invitation
to make an offer, to buy or sell any securities discussed herein. J.A. Glynn & Co., its affiliates, directors, officers, employees, employee benefit programs and
discretionary client accounts may have a long position in any securities listed herein. Past performance is not necessarily indicative of future performance.
The views expressed are those of the adviser as of October 2, 2012.
Opinions expressed in this document are those of the CIO of the adviser, are subject
to change without notice, and are not guarantees of future performance.