Market Politics

While keeping watch on interest rates, Wall Street is also sensitive to the winds of politics. For the past two decades the financial markets have followed a pattern: stocks rise in a presidential election year. The increases range from 17.9% in 1976, when Jimmy Carter was elected, to 4.3% in 1968, when Richard Nixon won his first term.

So far at least, this election year has been a different story. Despite rallies last week and in the summer, stocks are down for 1984. At its close last week, the Dow Jones industrial average was 32.71 points below its 1258.64 level at the end of 1983. The performance is ironic because Ronald Reagan, Wall Street's favored candidate, has been way ahead of Walter Mondale, despite some recent gains by the Democrat. Wall Streeters say that if Mondale were in front, the market would be doing much worse. Investors are leery of his plans to reduce the federal deficit by raising taxes, particularly on high-income households.

Regardless of who wins, the market can look forward to another lift right after the election, according to Gerald Hobbs and William Riley, professors of statistics and finance at West Virginia University. In a study of election-time stock behavior since 1900, they found that the market usually rises in the days just after the presidential voting. Their explanation: the uncertainty of the campaign is over. That temporary spurt generally lasts longer if the Republican candidate wins. Should investors want to rely on historical patterns, counsel Hobbs and Riley, they should sell on the 27th day after a Reagan victory, but only three days after a Mondale upset.

In the year after an election, the market usually reverses course and does better for Democratic Presidents than Republican ones. No Republican President since Calvin Coolidge in 1925 has enjoyed a stock rise in the year after being elected or reelected. Democratic winners, in contrast, have experienced five up years immediately after elections and only three downers. The apparent reason for the difference is that Republicans have tended to restrain Government spending and thus slow the economy, while Democrats have often pursued expansionary policies.

By that historical precedent, the market will go down next year if Reagan is reelected. But sellers, alas, need to know about another omen: in every year ending in 5 during this century, from 1905 to 1975, stocks have gone up, no matter which party was in power.