Weekly outlook

Presidential race takes investors’ eyes off the ball
 
By Tom Stevenson, 5 November 2008

While the world watches Washington, London soars 24% in a week There is only one story this week, so it would be odd not to acknowledge that one of the most compelling US Presidential races has now come to its conclusion. It would be odder, however, to pretend that the result will make a huge difference to investors on either side of the Atlantic. There is little evidence that the results of US presidential and congressional elections have any meaningful impact on investment portfolios, despite the best attempts of strategists to come up with statistically significant correlations. Approaching the end of one of the most volatile years ever for financial markets, and with investors mulling the impact of far more important events – like a global recession - 2008 looks like being no exception.

"Bear markets end when shares rise on bad news” Tom Stevenson

For what it is worth, the last ten elections since 1968 have seen seven modest rallies in the US stock market between election day and the end of the year. Three times the market has fallen in the last two months of the year. In the year after the election, the market has gone up four times and fallen six times^1.

Contrary to market wisdom, Republican victories are not necessarily better for markets than Democrat wins and it is not terribly important over the whole four year presidential cycle if the same party controls the White House and Capitol Hill or if power is split².

Clearly, investors will want to understand a new President’s propensity to tax and spend, his attitude to trade and defence and his policies on key areas such as health or energy. But these are only a part of the overall mix and not of themselves a reason to invest or not to invest.

Once it becomes clearer what is ongoing policy and what is mere campaign fodder, investors will come to decisions about sector and company winners and losers. But for the market as a whole it is not possible to draw any meaningful conclusions.

One other notable feature of the market movements in the immediate aftermath of previous elections has been how modest they have been. A gain of a few percentage points one year, a comparable loss another time. If these kinds of swings were to be recorded in 2008 they would be mere background noise compared with the ongoing market fluctuations that are marking the uncertain transition from financial crisis to economic slump and (we trust) recovery thereafter.

What has happened to the UK market over the past seven trading sessions alone puts all the Presidential data crunching into perspective. Since the FTSE 100 hit its recent low of 3,665 on October 27, it had risen by 24% to 4,556 by 4 November³. That is a spectacular recovery in such a short space of time, albeit hot on the heels of a ghastly plunge from 5,362 only two months ago.

The extreme volatility of the market since the beginning of September underlines a point that we have made with tedious regularity here. Attempting to time the market is simply impossible with any degree of accuracy. The speed of the bounce from very oversold situations such as last Monday’s is often so rapid that being out of the market can be an enormously expensive mistake.

Having just warned against trying to spot the bottom of the market, I’m not going to fall into the trap of attempting it myself. But one important point arises from this last week’s price surge. It has happened against a backdrop of largely poor economic news.

Here is a small selection of headlines from the Financial Times yesterday:

• Data gloom clouds election
• US car sales worst in 25 years
• Wave of losses looms for shipping industry
• Insolvency rate to rise 41% by end of 2009
• Wave of redundancies expected at Homebase

The fact that the market should have risen against this backdrop of unremitting gloom is a good sign because bear markets only end when share prices rise on bad news as well as good. When this happens you can be sure that the last seller has been shaken out and the foundation for a recovery has been laid.

It is the reverse of what happens at the top of a bull market when good news fails to boost share prices because at the height of the euphoria there are simply no more buyers to be found.

The new President’s problems may have only just begun, but investors can begin to hope that the worst may now be behind them.

	Nov 03/ Nov 04	Nov 04/ Nov 05	Nov 05/ Nov 06	Nov 06/ Nov 07	Nov 07/ Nov 08
FTSE 100 Index *	11.5%	18.9%	19.2%	13.5%	-32.3%

<sup>* Source: Datastream 1/11/08. Total return basis

1 Source: Financial Times, Tuesday 4 November 2008
2 Source: Fidelity research, October 2008
3 Source: www.ft.com, Tuesday 4 November 2008</sup>