Election Year Poses Challenge For Stks

The Dow is off to its best start to a year since 1998. But if history is a guide, this exuberance soon could give way to the first pangs of electoral anxiety.

In a typical presidential-election year, stocks start well but slip into a funk by spring, according to Ned Davis Research, which has measured election-year trends back to 1900. At least in part, the slump reflects the electoral unknowns, Ned Davis has concluded.

In a good year, investors deal with their jitters by late summer or early autumn and stocks recover. People get more comfortable with the November election outlook and put money back into stocks.

This year, with the Dow Jones Industrial Average up 6.2% in just over two months, many investors and analysts expect a pullback soon.

The looming election adds to ambient uncertainty about European debt and U.S. and Chinese growth prospects.

This year’s pre-election period is tense because the political debate is so polarized. Republicans promise to shrink government, while Democrats want to preserve government programs and, instead, increase taxes on the wealthy. The future seems unusually murky. The rancor is liable to be in full force this week amid Super Tuesday primary voting.

The Dow has risen 7.5% on average in presidential years since 1900, compared with 7.35% for all years, according to Ned Davis’s data.

There have been wide variations, however, and because the sample size is small, the historical trends are more illustrative than conclusive.

The last presidential year, 2008, was a glaring exception, as the financial crisis eclipsed all else and stocks fell for most of the year.

The market has done especially well with a Democratic president and a Republican Congress, Ned Davis’s studies show. For the current election to fit that scenario, President Obama would need to be re-elected and his party would need to lose the Senate to the Republicans, a result very much in play.

Since 1900, the Dow has averaged a 7.8% annual gain under Democratic presidents, compared with a 3% annual gain under Republicans. With a Democratic president and a Republican Congress, the Dow has gained an average 9.6% a year.

While that divided-government scenario has been good for stocks in the past, some worry it won’t be this time.

If bickering Republicans and Democrats in December fail to renew the Bush tax cuts, payroll-tax cuts and extended unemployment benefits, that could slow economic growth, says BlackRock market strategist Russ Koesterich.

‘The uncertainty itself is likely to disrupt markets if it goes that long,’ Mr. Koesterich says.

By E.S. Browning| http://chinese.wsj.com/gb/20120305/aot155527_ENversion.shtml

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