Market Hinges On Pols’ Action

By David Waddell

Politics Returns Last week, politicians grabbed headlines and moved markets. First, stimulator-in-Chief Ben Bernanke goosed markets to multi-year highs by pledging his continued devotion to easy money. Thankfully, he has learned that “conversational easing,” simply talking about quantitative easing, achieves the desired result without the inflationary hangover of the act itself. Rates fell and equities rose as fears of premature rate hikes abated. The Fed has been using the microphone as effectively as the printing press lately … good Central Bankers!

Across town, the Supreme Court heard opening arguments in Obamacare. Odds-maker Intrade places 63 percent odds the mandate will be ruled unconstitutional. Congress will could pursue an end around should the court muffle the mandate, but Obama will have to stand behind his constitutional over-reach.

That, matched with $4 gasoline, may sour public opinion even as unemployment levels fall and markets rise, challenging the re-election fait accompli he confided in Russian Federation President Dimitry Medvedev’s ear on Wednesday. Currently, Intrade places Obama’s re-election chances at 60 percent. But with Republicans closing ranks around Romney, the real contest with Obama now begins. Currently, Intrade places a 37 percent chance on a Romney win. With major policies in play, odds-making could become market moving. For evidence, as the mandate’s constitutional chances fell, private sector HMO shares rose. Shares in industry giant United Healthcare gained 8 percent on the week, surging to a four-year high. Imagine the resurgence in bank stocks with the repeal of Dodd Frank, or the flurry of IPO activity with the repeal of Sarbanes Oxley. I am not lobbying … I’m just sayin’. Should central planning policymakers diminish alongside their central policies, general market action may follow suit.

Light Legislation Stimulation Between 1948 and 2008, the final year of a presidential term produced stock market returns of 9.8 percent on average. Higher returns typically occur in the third year, averaging 22.3 percent. Obviously, we did not receive the benefit of those returns last year, although the dramatic returns in the first quarter of this year have somewhat compensated. Comparing the first-half and second-half numbers, the second half of a presidential cycle typically outperforms the first. While I would not invest simply upon these cyclical tendencies due to the small sample size, we can make some inferences. The second half of a presidential cycle tends to prioritize re-election and de-prioritize boat rocking. Alternatively, the first two years of the presidential cycle tend to be legislatively heavy as election promises come due. High government activity leads to high private sector anxiety, which portends low market returns. Clearly, for 2012, the legislative docket is pro-market light. With nine months remaining, history suggests the first quarter’s positive returns will persist. A positively trending stock market late into 2012 supports Obama’s re-election. Should history repeat itself, political burdens in 2013 may grow and diminish returns. For now, however, the legislation-free party continues.

David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.