While Pundits Fret, Has the Market Already Priced In This Election?
SAN FRANCISCO -- There's uncertainty and then there's
uncertainty
. With the Presidential election still undecided, today was like
The Day the Earth Stood Still . There was movement on Wall Street -- just in the wrong direction (for those long).
The
Nasdaq Composite Index
tumbled 5.4%, the
S&P 500
slid 1.6% and the
Dow Jones Industrial Average
lost 0.4%.
The Dow and S&P avoided bigger losses because of investors' desire for safety and the likelihood
Al Gore
will eventually succumb, which resulted in big gains for stocks such as
Merck
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,
Eli Lilly
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,
Philip Morris
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, and
Exxon Mobil
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.
But tech stocks -- including antitrust target
Microsoft
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-- tumbled at the likelihood of a victory by Gov.
George Bush
. Market players (who largely clamored for a Bush victory) considered that his tax-cut proposals, if enacted, would stimulate the economy. That would likely result in a more restrictive
Federal Reserve
and higher bond yields, which raises
valuation concerns about stocks with high multiples.
Remember when people thought tech stocks were immune to interest rates? They don't think that anymore.
Of course, the plain old uncertainty about the election contributed to today's weakness. However, few believe it will continue to have a major impact, even if the release of the final results is dragged further out. (The Florida recount, on which the whole election hinges in case you haven't been paying attention, is due by 5 p.m. EST tomorrow. However, counting absentee ballots from overseas and addressing lawsuits over allegedly confusing ballots in Palm Beach, Fla., raise the specter of additional delays.)
"Whatever information is out there has already been worked into the prices," said Milton Leontiades, dean of the
Rutgers University School of Business
in Camden, N.J. "I don't think the market is reacting as wildly as the pundits. It's been hashed out nines ways from Sunday. Whichever way
the election goes, there shouldn't be a big upset in whatever direction the market was inclined to go."
Without getting into what exactly the market's inclination is these days, one has to wonder how much higher the so-called Bush stocks can go. Buy on the rumor, sell on the news, right?
Have You Seen Junior's Grades?
Speaking of college professors, history classes, and those all-night (ahem) study sessions, this election ambiguity/angst may seem unprecedented -- but it isn't. The outcome of presidential elections has either been disputed, delayed or excruciatingly close on several occasions (1800, 1888, 1960, and 1980, for example). In two instances that seem similar to the current mess, the market's resulting performance was not favorable (for those long).
The 1876 election pitted
Republican Rutherford B. Hayes
against
Democrat Samuel J. Tilden
, who was heavily favored to win. Shortly before election day, Republican President
Ulysses S. Grant
sent federal soldiers to South Carolina and Louisiana to protect the rights of black voters (who just happened to be likely to vote for the party of
Lincoln).
Nevertheless, Tilden grabbed a narrow edge in the popular vote. But four states -- S.C., Louisiana, Oregon, and (
of course
) Florida -- sent in two sets of returns each, one from Democrats and one from Republicans. In the ensuing Electoral College vote, Tilden fell one vote shy of the (then) 185 necessary for victory.
Because the electoral votes from the four states with dual returns were disputed, Congress appointed a special
Electoral Commission to resolve the matter.
The election was ultimately resolved by one of the great smoke-filled-back-room deals in political history. In a nutshell, Southern Democrats agreed to support the findings of the Republican-dominated Commission, if Hayes agreed to end
Reconstruction and remove federal troops from the South. On March 2, 1877 (four months after the election) Hayes was declared the winner. Soon after taking office, Hayes kept his end of the deal.
In reaction, the stock market -- as measured by the Cowles Index -- fell 4% in December 1876, 3.5% in January 1877, and 5.9% in February before stabilizing in March, according to figures provided by
Bianco Research
of Barrington, Ill.
Maybe the 1876 election is a little beyond your memory banks. Surely, though, you recall the 1916 election, which pitted the incumbent
Democrat Woodrow Wilson
against
Republican Charles Evans Hughes
?
The stock market was closed on Election Day 1916. The day before, the Dow rose 1.2%, Hirsch reports.
Hughes was favored to win, but the election proved painfully tight and the outcome was delayed two days until results from California and Ohio were tabulated. The day after the election, the Dow fell 0.4%, according to Jeffrey Hirsch, vice president at
Stocktradersalmanac.com
in Old Tappan, N.J. It rose 0.1% the next day, then fell for three consecutive days (including a Saturday trading day) after Wilson was declared the victor.
After having risen 1.3% in the month of November 1916, the Dow dumped 10.4% in December that year, Hirsch reports.
Clearly, there are vast differences between 1876, 1916 and today -- the looming prospect of American involvement in
World War I
likely contributed more to that December 1916 decline than the election.
Beyond global issues, the role of the media may be the most important difference between then and now, and -- for once -- beneficial.
As bizarre, emotional and surreal the past 24-36 hours have been, imagine what it must have been like awaiting the results of the commission's findings in 1876? Or waiting for the
House of Representatives
to break the Electoral College
tie between
Thomas Jefferson
and
Aaron Burr
in 1800?
Today, at least, everybody knows where things stand and will know almost
instantaneously
when the results are final. That means additional election-related volatility is going to be muted.
Furthermore, the Nasdaq Comp is now below the midpoint of its recent trading range of 3000 to 3500. Buying tech stocks as the index approaches the low end of that range and selling as it approaches the top has been a successful strategy of late.
The Comp's fade from its recent highs on Nov. 3 shows history does indeed have a way of repeating itself.
P.S.
Should Al Gore ultimately lose (as seems likely) despite the advantages of incumbency and a healthy economy, the punditry will say it was because of his personality and/or
Clinton
fatigue.
Perhaps. But maybe people also voted with their wallets (as they're wont to do).
Consider, $2.2 trillion (with a "t") of stock market wealth was lost from the Nasdaq's peak in March to its trough in May, according to a study I commissioned with the
Milken Institute
in Santa Monica, Calif. (OK, so I just asked them for the data.) Compare that to 1987, when $1.3 trillion of market wealth was erased from the Dow Industrial's peak to trough, or 1929, when $700 billion was lost.
Those figures are all adjusted to Sept. 2000 dollars and based on the closing levels on the last day in the months in which the averages peaked and bottomed.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.
