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Navigating Obamanomics


Surprisingly, markets historically fare better under Democratic leadership.

The stock market yesterday did not offer President-Elect Barack Obama as warm a welcome as he would have liked. According to Bespoke, the Dow Jones Industrial Index's decline of 5.1% was its worst post-presidential-election-day decline in history.

As shown in the table below, yesterday was only the fourth time the Dow has ever lost more than 1% the day after a Presidential election (gray-shaded areas). "Coincidentally, all three previous periods occurred during the Great Depression, as well as after an election that gave complete control to one political party," said Bespoke.

The table also highlights how the Dow fared for the rest of the year. Unfortunately for the bulls, in each previous period the Dow had negative returns for an average loss of 2.1%.

Click to enlarge

But it would be wrong to necessarily ascribe the stock market's decline to the election of Mr. Obama, especially not knowing the details of his agenda. In my opinion, this happened as a result of investors focusing anew on the dismal economic situation that the new President will be inheriting. The message of recession-like conditions was yesterday confirmed by the worse-than-expected ISM Non-manufacturing Survey (down from 50.2 to 44.4).

Looking longer term, a BBC report refers to a 2006 study by Jeremy Siegel, a professor of finance at the Wharton School of the University of Pennsylvania, which shows that from 1948 to 2006 stock market returns averaged 15.3% a year under Democratic administrations, and just 9.5% a year under the Republicans.

Also, a recent study published in the New York Times showed that $10,000 invested in the S&P 500 Index in 1929 would have grown to $11,733 if invested under Republican presidents, but to $300,671 under Democratic presidents.

While urgent challenges will face Mr. Obama at the onset of his presidency, it remains difficult, in an environment of economic and profit recession, to read the stock market's direction and make a call on whether a secular low has been reached. At least, frantic actions by central banks, governments and the IMF to fend off a total economic collapse, as well as gradually improving credit market conditions (as seen from the TED spread declining by 211 basis points since the middle of October), are positive signs that we could be in a broad bottom area of this bear market. Shorter term, it is crucial for the recent lows (8,176 on the Dow Jones Industrial Index and 849 on the S&P 500 Index) to hold.

The last word goes to John Hussman (Hussman Funds):

"It is impossible to be a successful equity investor without the willingness to accept some amount of market risk when conditions appear frightening. If anything should be clear from the bubbles of recent years, the greatest risks are not when prices are depressed, the economy is weak, and investors are frightened, but rather when prices are elevated and an unendingly positive outlook for technology, or housing, or global growth, or private equity, or emerging markets, or commodities seems all but certain."
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