The 2012-2013 election season is exceptional, with more than 100 elections in economies accounting for approximately 60% of global GDP. So far, Goldman notes that markets have navigated through elections in Russia, Egypt, Greece, France, Mexico and Venezuela, among others. The closely watched Presidential election in the US will take place shortly, followed by the culmination of the political transition in China. Later on, markets will see countries like Italy, Iran, and Japan go to the ballots too. This extraordinary election season brings several questions to the forefront: Why are elections important market events? What are the main factors affecting that market-driving impact and its seasonality? And which states are key? Critically, Goldman finds that a divided government has on average produced considerably tighter fiscal policy - not a good sign.
Why elections matter
There are at least three reasons why elections matter for markets.
- First, the political stakes in elections often translate into policy changes that reshape the economic environment.
- Second, the regularity with which elections take place may lead to cyclical patterns in government and investment behavior.
- Third, elections can markedly increase uncertainty.
These factors can affect all asset classes, especially equities because of their strong sensitivity to changes in the economic outlook.
Election cycles and equities: Bad news for the first 2 years
The US Presidential election cycle matters for equity returns, at home and abroad. US Presidential election cycles (four-year cycles that always start between the second and eighth of November) since 1928, have tended to produce considerably lower US equity price returns in the first two years of the four-year cycle than in the last two (with historical averages around 3%-4% vs. 10%-12%). This is true even when attempting to account for other seasonal, market and economic factors.
US election process explained
- The US presidential election is held every four years on the Tuesday after the first Monday in November. Voters do not, technically, participate in a direct election of the president. They choose “electors”, who are pledged to one or another candidate. This is known as the Electoral College. The Electoral College consists of 538 electors. A majority of 270 electoral votes is required to elect the President.
- Each state has a certain number of electors to the college, based on the size of its population. Specifically, each state’s entitled allotment of electors equals the number of members in its Congressional delegation: one for each member in the House of Representatives plus one for each of its two Senators.
- In almost every state, the winner of the popular vote gets all the electoral college votes in that state. Because of this system, a candidate can take the White House without winning the popular vote. The exceptions to this are Maine and Nebraska, where the state winner receives two Electors and the winner of each congressional district receives one Elector. The District of Columbia is allocated 3 electors and treated like a state for purposes of the Electoral College.
- On the first Monday after the second Wednesday in December after the presidential election, the electors meet in their respective states, where they cast their votes for President and Vice President on separate ballots. Each state’s electoral votes are counted in a joint session of Congress on the 6th of January in the year following the meeting of the electors. The Vice President, as President of the Senate, presides over the count and announces the results of the vote. The President-Elect takes the oath of office and is sworn in as President of the United States on January 20th in the year following the Presidential election.
- If no Presidential candidate wins 270 or more electoral votes, the House of Representatives decides the Presidential election. The House would elect the President by majority vote, choosing from the three candidates who received the greatest number of electoral votes. The vote would be taken by state, with each state having one vote. It would be up to the group of representatives from each state to decide among themselves how their state would cast its one and only vote. Smaller states like Wyoming, Montana and Vermont, with only one representative would wield as much power as California or New York. The House would have until the 4th of March to select a president.
Source: National Archives and Records Administration (NARA), US Federal Register.
The Electoral Votes And Presidential Leanings
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The Swing States...
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And their Employment Picture...
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But the bottom line is that this looks ending with a Divided-Government - which bodes very poorly historically for the fiscal laxness that so many Keynesians are demanding...
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Charts: Goldman Sachs