With the 57th presidential election approaching this year is likely to be an important one for US stockmarkets.
There may be more positive data coming out of America, with growth steady and unemployment falling, but some big decisions remain – the biggest being Obama or not Obama – which will undoubtedly have an impact on the country’s recovery.
Analysis conducted by Investment Adviser shows that familiarity and continuity have helped to steady markets in the past.
Out of the four times that the US economy has been in recession since 1920, the incumbent party lost three out of four times and the S&P 500 fell, on average, by 3 per cent.
In the year following Obama being elected in 2008, the S&P 500 went from a loss of 12.77 per cent in the 12 months to December 31 2008, to a gain of 12.59 per cent in the year to December 31 2009, according to Morningstar.
“Typically when the incumbent president is up for re-election, markets tend to do well, not least because there’s been some market stimulus or market friendly packages to help the consumer, or help the equity market. They [politicians] know if you can generate a feel good factor ahead of the election, it will increase their chances of electoral success,” says Paul Atkinson, head of North American equities at Aberdeen.
The prospect of the US falling back into recession would not bode well for Mr Obama’s future in the White House or for the US stockmarket. But how likely is this scenario?
Matt Rubin, head of investment strategy at Neuberger Berman, argues: “While fears of a double-dip recession have periodically emerged during the past two years amid slowing growth and spiking headline risk, we believe growth in the range of 1.5 per cent to 2 per cent will be enough to keep the United States out of recession.”
However, according to Mr Rubin, even if the US avoids recession, the odds are still currently going against Mr Obama.
“History is not on Obama’s side. In the past 13 elections, no president has been re-elected with an approval rating below 48 per cent and unemployment above 7.4 per cent. He is currently at 43 per cent and unemployment is sitting at 8.6 per cent,” he says.
Mr Atkinson adds the election could be fought on the battleground of jobs growth and economic stability, and says that if this is the case, then Republican Mitt Romney would be the most suitable candidate to execute this.
“Given that job growth has been so anaemic over the past 10 years, then I would assume that the electorate will be swayed by the person who they think is most economically friendly and has a better economic track record, which in my mind points to Mitt Romney,” he says.
By contrast, Frances Hudson, global thematic strategist at Standard Life Investments, argues that Mr Obama’s approval ratings may not be great, but that they are not low enough to preclude him being re-elected.
“Americans have a track record of re-electing people that you would think have seen everything go wrong and, on that basis, they shouldn’t be re-elected, like [Bill] Clinton, for example. I’m not suggesting that Obama has done anything that wrong, he just hasn’t achieved, and there are various perceptions that he hasn’t really engaged with the people.”
Mr Rubin agrees, adding that president Obama will be able to point to enough successes, including nine straight quarters of economic growth and 22 consecutive months of private sector job gains to win re-election.
However, Ms Hudson notes the past doesn’t necessarily influence the present, and that Mr Obama’s fate will depend on who his opponent turns out to be.
“It is February and we still don’t know who the Republican candidate is going to be. According to Americans that I’ve spoken to, it seems to make a big difference.
“If it were to be Mitt Romney, they don’t seem to think that there are enough differences between his policies and Obama’s policies for him to beat Obama, whereas someone like Newt Gingrich, who can position himself quite a long way from Obama, would provide more of a true contest.”
On policy, according to Ms Hudson, Mr Obama has the advantage of already having been in power for more than three years, giving the ability to “move more quickly” if he wins.
“If you look at a four year election cycle, really the window of opportunity to introduce radical legislation is quite short.”
However, Ms Hudson adds that whoever the victor is, they have little room for manoeuvre in terms of policy, and a rise in taxes and cuts in spending is inevitable.
“The problem is so big and they’re at a stage where they probably can’t postpone it for much longer.
“With the negotiations that have already happened and the stalemate of last year, it means that some of the cuts are going to come anyway,” adds Ms Hudson.
A re-election for Obama is not certain to be a positive for markets either.
In the 2004 election, before president George Bush was re-elected, the S&P 500 made a gain of 15.73 per cent in the year of the election, but that dropped to gains of just 3.39 per cent in 2005, the year following.
Mr Atkinson concludes: “If GDP stays in the 2.5 per cent range and the healing process continues, there’s a sense that 2012 could be a more stable and less volatile year. But the defining characteristic will be macro shocks. In the absence of macro shocks then actually corporate US and valuations are still in pretty good shape,” he concludes.
Simona Stankovska is features writer at Investment Adviser
