Don’t Count On It

Story Highlights:

• Barack Obama's inauguration should begin to remove some uncertainty and allay widespread fears—he likely won't be as extreme in action as he was in campaign rhetoric.
• Pragmatism—not socialism, as some warned—seems Obama's modus so far.

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In a historic inaugural ceremony, Barack Obama was sworn in as the 44th US president Tuesday morning in Washington. All politics aside, what does Obama's inauguration mean for investors? Tuesday's history coincided with a big market drop. President Obama campaigned promising change, but rocky markets are in line with what many fear from a Democratic president. However, no matter how much change is promised, a politician's a politician—and President Obama isn't likely to be nearly as extreme in action as he was in campaign rhetoric.

We view political drivers through the prism of history. Fourth years are typically positive for markets in the election cycle, but when executive power transfers from Republican to Democrat, all else being equal, stocks tend to do worse on average during the election year. This effect is largely explained by market expectations a Democrat will be bad for business. Democrats tend to campaign on topics that seem "anti-business" while Republicans profess to be "pro-business."

Come inaugural year, both Republicans and Democrats generally turn on their power base and move toward the center, or face an uphill reelection battle. Democrats talk anti-business election year, but do far less anti-business thingsinaugural year, and markets are pleasantly surprised. The reverse holds true for Republicans. Hence, the first year for Democrats after a party switch tends to deliver better and more uniformly positive returns. You can see this in history.

Barack Obama, though calling for change, is behaving largely as his predecessors have done—campaigning on issues markets tend to dislike. But since his election, President Obama has quickly moved toward the center. Obama's economic advisers aren't the outright socialists many may have feared—in fact, they aren't even new! Instead of fresh faces, most are hardened veterans from past administrations. Speaking of hardened veterans, his cabinet even features former President George W. Bush's secretary of defense, Robert Gates. Had Obama campaigned on hiring a slew of Clinton advisors and keeping Bush's secretary of defense, it's hard to imagine he would have won the primary, let alone the election. Further, the administration's economic stimulus plan appears more pragmatic than idealistic.

So, as lots of folks rightly call this election historic, perhaps the better question for investors is: Have politicians really changed? The market's Magic 8-Ball would probably say, "Don't count on it." All else being equal, we envision markets becoming pleasantly surprised by less anti-business market upheaval than anticipated. And though things won't be economically rosy for a while, that's one less thing investors have to worry about.