The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.NEW YORK ( TheStreet) -- This week marks six months until election day. During the next six months, the elections will likely become an increasingly potent driver of the markets. While we believe the impact for changes to the makeup of Congress may be more meaningful than the presidential election, we will tackle that in a later commentary. In this week's commentary, we focus on the presidential election's relationship to the performance of the markets and economy. Specifically, we address:
It is notable that the best years for bonds have been during the first two years of a presidential term. This is no doubt related to the more stimulative (and potentially inflationary) fiscal and monetary policy that takes effect in years three and four. The election impact on taxes plays a role for municipal bonds. As a key part of their agenda, Republican candidates for president in 2012 have indicated they would seek to make permanent the tax cuts on income, capital gains, and dividends that are due to expire in 2012, while President Obama has indicated a desire to let them expire. The potential for higher taxes on capital gains and dividends could be a positive for the municipal bond market, which may see a demand response to higher marginal tax rates. Economic Impact on Election The impact of the economy on the election can most clearly be seen through the relationship between income growth in the year leading up to the election and election results. As you can see in Chart 3, inflation-adjusted, after-tax income growth of about 3-4% appears to be the threshold for incumbents to get 50% of the popular vote. This measure of per capita income, contained in last week's Personal Income and Spending report, is only growing at 0.3%.
Clearly, factors other than taxes, inflation, and income have a bearing on the election. However, income growth and related job creation may be the key measures by which the presidency will be judged. While job growth has improved in recent months to over 200,000 new jobs per month, helping to boost incomes, inflation has also risen. Election Impact on Economy The economy is impacted by fiscal, monetary and regulatory policy. The outcome of this year's election may be more consequential, given that it will help to determine the path taken in 2013 to address the U.S.'s fiscal challenges including the debt ceiling and potential debt downgrades. In addition, the tax increases and spending cuts in 2013 already written into existing legislation amount to 3.5% of GDP (Gross Domestic Product), the largest percentage since 1947. The U.S. has never experienced a fiscal drag of 2% or more of GDP without an economic recession. As much as ever, the election is likely to have a major impact on the economy.