Presidential Election: The Economic Impact

In just a matter of hours our country’s next president will be named by the voters of America, with celebrations in order for the winning party, and maybe …

In just a matter of hours our country’s next president will be named by the voters of America, with celebrations in order for the winning party, and maybe the economy. A series of economic missteps aligned to bring about economic gloom and doom during a presidential election year, and while the naming of our country’s next leader is not the cure-all remedy to the financial crisis, it likely won’t hurt, because at the least, it will provide some stability in a time of widespread uncertainty.

So how exactly does the typical two-candidate horse race have an impact on our country’s financial markets? The answer: in rather interesting and unexpected ways.

Take, for example, the 2000 presidential election between Republican George W. Bush and Democrat Al Gore, a race that was almost too close to call, and the results of which many people still dispute. During the candidates’ battle to Election Day, a joint study by Brown University and the National Bureau of Economic Research found that firms across five major industries standing to benefit from a specific candidate’s victory typically performed with that candidate in the polls. If Al Gore suddenly found himself behind in the polls, companies in his corner or that would benefit from him being elected would also find themselves down, according to ScienceBlog.com, a science news service.

In the end, firms in favor of the eventual victor, President Bush, found themselves worth 3 percent more while, on the other hand, those in favor of Gore were suddenly worth 6 percent less, according to the joint study. Before the newly elected president could even enact a single policy, a number of companies were already directly impacted by the outcome.

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While major companies may see their bottom lines fluctuate leading up to and immediately after Election Day, the U.S. stock market can quickly become schizophrenic when it comes to picking our country’s new commander in chief. And the last several weeks have indeed seen the Dow Jones move wildly, with swings of hundreds of points in either direction—mostly down.

Looking back at the past 25 presidential election years, the Dow Jones Industrial Average has increased some 68 percent of the time, or 17 of those presidential election years, according to Money Morning, an investment news website. With the unexpected events wreaking havoc on our economy, 2008 will most likely not join that group.

What both financial experts and everyday Americans alike can look forward to, however, will be the month of January 2009. January will not only officially kick off four years of either President Obama or President McCain, but it will also be a market barometer for the financial year. When the stock market posts a gain in the month of January, it goes on to end the year with a gain 91 percent of the time, according to Money Morning.

One thing to keep in mind during this election is that many of the links binding the election, its candidates and parties and the U.S. economy can be subject to change at any time. Take, for example, Yale Hirsch’s election cycle theory, stating that the stock market will perform well in an election year, subsequently do poorly the year after the election and then slowly improve up until the next election, according to the Associated Press. Many would be hard-pressed to see the relevance of that theory in this year’s election, as it seems today’s stock market has nowhere to go but up—or so hope the nation’s citizens who have seen $2 trillion lost to the stock market’s recent nosedive.

How about this food for thought: After the 1928 presidential election, ushering Herbert Hoover into office, the Dow increased greatly, only to flat-line the next year and eventually send the United States into the Great Depression. We can’t yet draw any parallels or know what will happen as a result of today’s election, but in a few years, it will be interesting to look back on today’s economic climate and see how the outcome of the presidential election—one of the longest and most hard-fought races in modern American politics—shaped our nation’s economy.

Our next president will have a large task on his hands to help fix an ailing and broken economy when he takes office. Many investors may adopt a wait-and-see strategy in the coming months to find out what the new president’s plans are and what measures he will take to fix the economic crisis.

And if that doesn’t work, then hopefully January is one heck of a month, financially speaking.

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