With the Obama-McCain contest nearing completion, we decided to bust some Wall Street myths about bulls, bears, elephants and donkeys.
For the first time in 76 years, a financial crisis occurs at the same time as the American presidential election. Based on recent polls, the coincidence seems to have increased the chances that Illinois Senator Barack Obama, Democratic candidate, will beat John McCain, Republican Senator from Arizona, on November 4th.
The financial crisis has affected the presidential race, so how does the election affect financial markets? Pundits endlessly come up with theories on this issue, and often their answers are suspiciously similar to their political views.
Thus, those on the right insist that Obama’s tax proposals would be disastrous for investors. More liberal, Obama supporters claim that the market will recover if the Democrats are given the task of leading the world out of the financial crisis.
Some of these claims are impossible to prove or disprove. But there are still some myths about the election and the stock market that need clearing up.
Myth #1: The stock market waits to see who wins.
Stock traders are used to looking at data, considering different probabilities and betting investments based on that. Among fund managers, analysts and other market professionals polled over the past week, there is some doubt about the most likely outcome of the 2008 presidential election. Consider two pieces of evidence that “the smart money” from Wall Street would be likely to take seriously.
In the electronic market of Iowa, operators can wager money to bet on the outcome of the presidential race. On October 3, Obama was given a 70% chance of winning. On October 23, his chances stood at 87%.
Then there are the polls. Nate Silver, who was the first to fame in the field of baseball statistics, conducts a sophisticated daily analysis of data from all polling places that incorporates, state by state, demographic factors, historical data and records polling station precedents. On October 23, on Silver’s website, www.fivethirtyeight.com, the probability of an Obama victory was estimated at 93.5%.
That’s not to say McCain can’t win the election. (Google the name “Thomas E. Dewey” when you have a moment.) He still has a chance, but based on predictions that the street is still watching. The probability of a win is so low that very few investors are currently willing to bet money on a McCain win.
Myth #2: Wall Street is disappointed that Obama is leading in the polls because they always want a Republican to win.
There is anecdotal evidence that investors in certain sectors are worried about an Obama victory. With Democrats in power, Washington could restrict profits by redistributing them to companies in the healthcare or energy sectors, for example.
And it’s true that it’s not hard to find a Republican on Wall Street: Wealthy investors and financial professionals tend to favor low taxes and deregulation, key ideas on the platform of the Republican Party.
However, Obama also has many supporters among investors. Warren Buffett, CEO of Berkshire Hathaway is an Obama supporter, and many hedge fund managers and others have contributed to his campaign. Indeed, according to the Center for Responsive Politics, a nongovernmental organization that scrutinizes the financial reports of candidates for the Federal Election Commission, financial backers from the investment and stock market gave $11.1 million for the Obama’s campaign, and only $7.7 million to date for McCain’s.
A 2004 university study (by Scott Beyer, Gerald Jensen, and Robert Johnson) reports that, from 1926 to 2000, the major Standard & Poor’s 500 index had actually performed better in a Democratic regime than in a Republican regime: 15.24 % against 10.78%. However, this advantage for Democrats evaporated when the impact of the Federal Reserve – which sets interest rates – was taken into account.
Myth #3: Investors and traders are watching the election closely, watching the candidates’ proposals and rhetoric.
“Truthfully, I don’t think the market pays much attention to it. said John Merrill, chief investment officer of Tanglewood Wealth Management, when asked about the election. “Today, the market and the economy are much more decisive than the presidential election. »
It’s not that the presidential election doesn’t matter to investors. It’s just that other events – notably the financial crisis and the economic downturn – have taken center stage. “We have so many other things on the table right now that we haven’t even thought about the election. says Greg Church, president of Church Capital Management.
Wall Street often shows healthy skepticism about candidates’ campaign rhetoric and platforms. American history is replete with examples of politicians abandoning their promises once invested. McCain, if successful, would struggle to advance his proposals in a Democratic Congress, observers say. And both candidates would need to adapt their policies to the realities of the financial crisis and recession. “What matters is less who is elected than the type of policy that will be applied. said Andy Bischel, chairman of SKBA Capital Management and co-director of the AHA Socially Responsible Equity Fund.
Myth #4: The market is worried about a possible increase in the tax rate on stock market gains.
Earlier this year, some were worried about a stock market sell-off if Obama is elected. This was due to his proposal to raise taxes on stock market gains for wealthy investors. The theory was that investors would rush to sell their shares before the tax rate increase took effect.
Although the tax increase may be a burden on the economy, this theory based on a short-term impact of Obama’s tax plan has always been questioned. “In general, you try not to let the tax implications dictate your [investment] decisions. says Micah Porter, financial planner at Minerva Planning in Atlanta.
As stock prices have plunged over the past two months, those concerns have mostly subsided. The closing price of the S&P500 was 908.11 on October 23. Over the past 10 years, market transactions have always traded above this threshold, except for the brief period from July 2002 to April 2003. If you bought shares at any other time, there is good chances that you have made no taxable stock market gain.
Myth #5: Wealthy investors can blow their breath because the next President wouldn’t dare to raise income taxes during a recession.
Investors don’t like to pay taxes, so Obama’s proposals to raise taxes on the wealthy are a recurring topic of conversation among market professionals. However economists and Washington watchers see little prospect of avoiding a tax hike, even if McCain is elected.
One of the reasons is the federal government’s bailout, which adds about $700 billion to an already large budget deficit. Even before the crisis hit, President George W. Bush and a Republican Congress had been unable to extend the Bush tax cuts beyond their scheduled expiration in 2010. High can hurt, a huge budget deficit is really a long-term problem. says Victor Li, an economics professor at the Villanova School of Business. “Whoever wins, state revenues have to be bolstered somewhere. Taxes must be increased. »
Many hope that Obama – or McCain, making a deal with a Democratic Congress – can delay this tax hike until the economy picks up. “Obama needs to be really realistic about raising taxes in what could be a really bad economic environment. says Church.
“Right now, Democrats are focused on stimulating the economy. says Daniel Clifton of Strategas Research Partners. However, a tax increase during a recession would not be unusual, he adds. “Generally, the government has to raise taxes in a recession because the federal deficit gets that much higher. »
