There are plenty of analogs for market and economic behavior currently echoing the past - some scary, some terrifying, and some hopeful. Barclays found two interestingly similar election-bound relationships to the current environment but with very different outcomes: Harry Truman's successful 'Fair Deal' 1948 campaign and Jimmy Carter's unsuccessful 1980 re-election effort.
In both cases business confidence and capital spending were soft during the election year; however, during the sprint to the November elections the market went in completely different directions.
In 1948, the S&P 500 dropped 11% from June through late September, bounced in October then fell sharply after Truman won in a shocking upset.
In 1980, the S&P 500 rallied 36% from March through late September, had a 5% correction in October followed by a post-election rally to higher levels after Reagan won a decisive victory.
Capital spending fell sharply in late 1948 and 1H49, driving the economy into recession due in part to a monetary policy mistake (raising the reserve requirement), while in 1981 capital spending increased sharply.
This year’s election had similarities with both. Unfortunately the market traded as if this was 1980, but it turns out we could be headed for ‘Truman’s 3rd term’ (See Figures 3 and 4).
Clearly the risk is a policy mistake – this time fiscal – which could drive another capital spending bust and a shallow recession.
So, will Obama's 2nd Term be more like Truman's 3rd or Reagan's 1st for the market and the economy - based on potential for policy mistake... or c) none of the above...