Is the Election Really Uncertain?

A hot topic for stock and bond investors is the future direction of prices and interest rates once we finally get the election behind us. A lot of folks expect that the capital markets will enjoy a post-election rally because the uncertainty will be over. That sounds nice, but unfortunately there is very little in stock market history to support a post-election rally. 1952 and 1976 have been the only two election years since 1950 when the trend of the market was changed upon resolution of the presidential contest.

Why is this the case? Probably because there really isn't any uncertainty, or more specifically there is nothing new about a presidential election. We have two candidates, both offering a lot of promises, and one of them will win the election.

Too often pundits and investment strategists let their politics cloud their objective judgment, but this is all very simple. If President Bush wins we will have more of the same; whether you think that is good or bad is inconsequential, as a Bush presidency is understood by market participants. If Sen. John Kerry wins he will have to deal with a Republican-controlled House and Senate, and many of the things he is promising will not be passed, at least not for the first two years. This is not very different from 12 years ago. President Clinton made promises about reforming health care, similar to Kerry today, which went nowhere because of the same type of gridlock Kerry faces.

What will happen to the markets if, as some fear, we don't get a result by early Wednesday morning? In 2000, as the election debacle unfolded, the S&P 500 dropped 9%, hitting a short-term low of 1,300 on Nov. 30, 2000. On Dec. 4, the market then began a small rally lasting for six trading days that took the index to a closing high of 1,380 on Dec. 11, two days before Al Gore finally conceded. Once the "uncertainty" was over and Bush won, the market resumed the downtrend that had started earlier that year. Despite what we remember, the election was not the most important issue confronting the market.

In fact, the election is never the single most important issue. I believe people are more concerned about, in no particular order, Iraq, terrorism, jobs, deficits, interest rates, the economy, the dollar, and probably a few other issues I can't even think of. We know how the election will end: We will have a winner. That's it. We don't know how any of the other things I mentioned will end.

The market has already experienced what it is like to have to wait a month to have a winner declared. If that happens again, I would expect any negative reaction to be less damaging than the 9% given up in 2000. History has shown it has been better to be a buyer than a seller on weakness caused by this type of event.

The bottom line is that the uncertainty is wildly overstated, and it would be unwise to let your portfolio get caught in a very short-term event.

Fool contributorRoger Nusbaum is an investment manager and wildland firefighter in Prescott, Ariz. At press time, neither he nor his clients owned any of the stocks mentioned.


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