Democrats vs Republicans – let the battle commence
OVERALL STATE OF THE ECONOMY
History teaches us that low inflation and a buoyant economy favour the incumbent US president when he is running for re-election. Voters inevitably associate strong economic growth with the incumbent party. Recent economic news has been better than expected, improving President Obama’s chances, although the polls remain very close. In particular, the housing market appears to be showing signs of improvement – this matters because housing is a key determinant of consumer confidence and consumer spending is the biggest contributor to US GDP.
STOCK MARKET PERFORMANCE
A buoyant stock market can also make re-election of the incumbent more likely. Again, this would appear to favour President Obama as the stock market hit bottom soon after his inauguration. Despite some volatility along the way, the S&P 500 is significantly higher than at the time of the last election. It might be thought that a Republican win would be better for the stock markets – the received wisdom is that the Republican Party is more pro-business. However, evidence suggests that Democrats might actually be better for investors. The chart shows how, over the last 48 years, covering 12 elections, the S&P 500 has delivered a higher average annual return under the Democrats.
Other factors may be less important than expected. While it might be expected that factors such as unemployment and the ability of the incumbent government to offer ‘sweeteners’ in the form of tax cuts and spending would have an impact on the outcome, this may not be the case.
History has shown that unemployment is a relatively poor indicator of election results. There are two striking instances, in 1968 and 2000, when the Democrats lost despite unemployment falling during the run up to the election. The recent fall in US unemployment to less than 8% represents a marked improvement on the high levels of unemployment during most of President Obama’s first term. However, the jobless total is still at a level at which Presidents have previously failed to achieve re-election.
With attention focused on the need for the US government to reduce its large budget deficit, government spending is not necessarily seen as a vote winner. In fact, the looming ‘fiscal cliff’ of automatic spending cuts and tax rises in January 2013 makes fiscal policy a minefield for both sides this year. Despite the common perception that US presidents tend to cut taxes and ramp up spending prior to elections, the chart below reveals that this is, in fact, not the case. Although there have been noticeable instances in the past, during Nixon’s election campaign in 1972, for example, the greatest expenditure tends to take place in the first two years of an election.