Election Years Are Steeped in Markets’ Least Favorite Thing: Uncertainty

Mergers and acquisitions activity is down. Initial public offerings are practically dead. Companies are cutting spending. The stock market is increasingly volatile. Gross domestic product is stalling.

What explains it all?

Perhaps Hillary Clinton and Donald Trump.

A growing body of research shows that during presidential election years — particularly ones like this when there is such uncertainty about the nation’s future — industry becomes almost paralyzed. A look at the last several dozen election cycles shows that during the final year of a presidential term, big corporate investments are routinely postponed, and big deals are put on the back burner.

The research is even more persuasive on the final year of an eight-year presidential term, when a new candidate inevitably will become president.

The trend is already playing out that way this year: Verizon is slimming its capital spending; so are Dupont and Union Pacific. McDonald’s and Delta Air Lines are in standstill mode, and Exxon Mobil is cutting back drastically. (Admittedly,

the energy complex has its own issues, with the price of oil remaining at low levels.)

Of course, there are many factors in play beyond the election, from the possibility of the Federal Reserve raising interest rates to the potential “Brexit” — Britain seceding from the European Union — to a slowdown in China and emerging markets.

But the circus that is the United States presidential election may be playing an even bigger role, consciously or subconsciously, than most executives may want to admit.

If history is any guide, from now till Nov. 8, the stock market is likely to trend down, putting a psychological damper on deal-making and initial public offerings. According to research by Stephen Suttmeier, a technical analyst at Bank of America Merrill Lynch Global Research, the Standard & Poor’s 500-stock index has fallen an average of 2.8 percent since 1928 during election years like this one, in which the incumbent — in this case, President Obama — is not seeking re-election. The final year of an incumbent’s eight-year term is the only year that averaged negative returns, Mr. Suttmeier’s research said.

This phenomenon pushes down far more than just the stock market; the real economy is affected too. Despite all sorts of the idiosyncratic factors that have seemingly influenced the global economy over the years, there is a clear trend. “Electoral uncertainty induces a decline in G.D.P. portions composed of costly-to- undo investments,” according to a widely discussed 2014 study by Brandice Canes- Wrone and Christian Ponce de Leon of Princeton University titled “Elections, Uncertainty, and Economic Outcomes.”

It is a favorite epithet of C.E.O.s: “uncertainty.” The word is routinely used as a catchall for why things aren’t going as well as they should. Sometimes the uncertainty is economic, but these days it is mostly political.

“Election outcomes are relevant to corporate decisions, as they have implications for industry regulation, monetary and trade policy, taxation, and, in more extreme cases, the possible expropriation or nationalization of private firms,” Brandon Julio, a professor at the London Business School, wrote in the Journal of

Finance. “If an election can potentially result in a bad outcome from a firm’s perspective, the option value of waiting to invest increases, and the firm may rationally delay investment until some or all of the policy uncertainty is resolved.”

Mr. Julio, together with his co-author, Youngsuk Yook of the Federal Reserve, examined not just elections in the United States but in 48 other countries from 1980 to 2005. They found a clear pattern: “During election years, firms reduce investment expenditures by an average of 4.8 percent relative to nonelection years,” their study said.

Strikingly, Mr. Suttmeier’s finding that the final year of an incumbent’s eight- year term was the only year that averaged negative returns in the United States may have an explanation, albeit one that involves a bit of conspiracy theorizing. “There has been much debate over whether incumbents manipulate fiscal and monetary policy instruments to influence the level of economic activity prior to an election in order to maximize the probability of re-election,” Mr. Julio said in his own study.

Critics of the Democratic Party have suggested that Janet L. Yellen, chairwoman of the Federal Reserve and an Obama appointee, will be hard pressed to raise interest rates significantly in an election year, out of fear that such a move might slow the economy and give the Republicans a stronger position.

Whatever the case, with the stock market continuing to struggle, the prospects of lively corporate activity re-emerging this year are slim. Companies are already showing signs of shying away from big deals; while there have been a handful of headline-grabbing transactions, merger volume in the first quarter of the year is already down 38 percent from last year, according to Dealogic.

Particularly pronounced is the flight from deals that could have antitrust implications or potential tax consequences. Tax inversion deals, for example, in which companies move their headquarters outside the United States to enjoy lower tax rates, have fallen out of favor in part because a change in leadership could lead to changes in the way such deals are treated in the future; both Mrs. Clinton and Mr. Trump have talked about their ambitions for corporate tax reform. And deals in the defense industry and others that rely on government contracts are also likely to slow, analysts said.

The big question — bigger than what the rest of the year will look like — is whether the economy will pick up once the issue of the next president is decided. All the data says it should — indeed, much of the economic activity may just be delayed. But in an increasingly polarized country, the pain of electoral strife could linger on Wall Street far longer than anyone would wish.

Do you think the home values in your area have recently gone up? Check and see with my free home evaluation.

E-Mail me at kdarr@stlrealestatellc.com to set up a meeting!


Keep up to date on your most important investment – your home!

Request Help Selling Your House

Article Written By: Kevin Darr, a licensed Real Estate Agent at STL Real Estate.

Thinking of buying or selling a home in the St. Louis metro area? Call Kevin today for a free home evaluation or buyer’s presentation. Kevin can be reached at 314-780-3090.