How the Election is Hurting the Industry (All Politics Aside)

The economy continues to show strength, so why does it seem that projects are being put off and decisions on furniture slow in coming? Blame the bulls and bears on the elephants and donkeys: During major election years, the economy holds its breath, which means projects are put off until politics is sorted out.

And it has nothing to do with the party in power or the one that is poised to take over. Capitalism hates volatility, and this election cycle is the definition of volatile, so until economic watchers exhale, expect some chop when it comes to furniture buying decisions.

Since 1928, the Standard & Poor’s 500 — a widely watched benchmark of U.S. large-cap companies — has dropped an average of 2.8 percent in presidential election years that don’t include an incumbent seeking re-election, according to Stephen Suttmeier, technical research analyst at Bank of America Merrill Lynch Global Research. Of the eight years in a two-term presidential cycle, the final year of the second term when the incumbent can’t run is the only one that has averaged negative market returns, Suttmeier says. By contrast, in years when the sitting president is up for re-election, the S&P 500 has averaged returns of 12.6 percent. The average for all years from 1928 through 2014 is 7.5 percent.

Unfortunately, political pundits tend to spread fear rather than fact when pushing their candidate’s policies, so it might be better to turn off CNBC and FOX for the duration of the election. There’s a name for it: confirmation bias. It is when investors seek out only information that reinforces their worldview. Time magazine noted on March 6, 2009, for instance, Stanford professor Michael Boskin argued that Obama’s policies, marked by higher spending, taxes and regulations, were “killing the Dow.” If you were fearful, this insight from a respected economist might have reinforced your inclination to sell.

The problem is that all pundits, like investors, tend to see things through the lens of their own political views. Boskin was chairman of George H.W. Bush’s Council of Economic Advisers, and March 6, it turned out, was about the absolute low point of the bear market in 2009. If you let this warning send you to the sidelines, you would have missed out on more than 11,000 Dow points. Columbia economist Joseph Stiglitz, a key adviser to President Bill Clinton, argued that George W. Bush’s 2003 tax cuts would be reckless and ineffectual, especially for new-economy companies. Those who listened and pulled out of the market missed a chance to double their money in tech stocks over the next four years.

All presidential elections are volatile, but when a departing two-term president leaves office as Obama is about to, it creates a void that financial markets typically find unnerving. According to Merrill Lynch, continuity isn’t the only reason markets prefer presidents seeking re-election. They also like incumbents because, as they’re trying to get re-elected, they tend to obsess over economic issues and promote market-friendly policies. “Statistics such as unemployment and economic growth are highly correlated with an incumbent being re-elected,” says Mary Ann Bartels, head of Merrill Lynch Wealth Management Portfolio Strategy.

Incumbents also are going to be doing as much as they can to support the business cycle, make things look good and make people feel good, so those people will say, “I’m going to re-elect this person.”

All presidential elections are volatile, but when a departing two-term president leaves office as Obama is about to, it creates a void that financial markets typically find unnerving.

 

Whether rational or not, the election does affect the business cycle. Some 60 percent of business economists say uncertainty about the November vote is damaging prospects for growth this year, according to a survey released in June. In its latest forecasts, members of the National Association for Business Economics have once again marked down their expectations for this year, pegging the overall growth in gross domestic product at just 1.8 percent. That’s down from 2.2 percent in the group’s March survey and 2.6 percent in December of last year.

“Businesses are generally prepared to not have everything go their way, but they have a much harder time when they don’t know what’s going to happen or what to expect,” says Greg Daco, head of U.S. macroeconomics at Oxford Economics and a NABE survey analyst.

The election has an impact on commercial real estate as well. According to research by Jones Lang LaSalle, which tracked the New York market to see if previous elections impacted commercial leases, there was a significant drop in new leasing activity, especially among businesses occupying more than 100,000 square feet of space, during election years.

If it makes you feel better (though it shouldn’t), political uncertainty seems to be a problem around the world. From Brexit to the rise of nationalist views, nearly one in four NABE economists say those issues are important factors that will hold back the world’s economy the next two years. The global economy is stuck in a “low-growth trap” that governments will have to make concerted efforts to break out of, warns the Organization for Economic Cooperation and Development in a recent report.

With businesses and consumers cautious about spending and investing, the OECD forecast global growth at just 3 percent this year, unchanged from 2015, and the slowest pace since the end of the Great Recession.

Not all the election news is gloomy. The economy may look forward to a possible “relief rally” in 2017, after a new president takes over. On average, the first year of a new presidential term sees the markets rise by 6 percent. That’s below the 7.5 percent average for all years (going back to 1928), but still a positive signal the country has survived its latest election drama intact.

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