Presidential Precedent: 2012's Electoral Sweet Spot

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) -- With the 2012 U.S. presidential race in full swing, rhetoric is also heating up. Rhetoric aside (which is always heated in elections -- nothing unusual about that), election years are typically good for stocks. U.S. stocks have historically done well in election years, averaging 10.9% since 1928. Even better, this year we either re-elect a Democrat or elect a Republican, making it a sweet spot for stocks. Since 1928, the S&P 500 has risen 14.5% in election years when a Democrat is re-elected and 18.8% when a Republican takes the reins.
Can President Barack Obama win re-election? His approval ratings are low, but a Democratic incumbent has some advantages.

Who is the likely winner? Many view incumbent Barack Obama's chances as falling, since his approval rating is at 47%. Observers often remind us that no president has been re-elected with such a low approval rating. Yet the election is more than five months away, and ratings this early haven't proven predictive. Bill Clinton and Ronald Reagan handily won second terms despite hitting much lower approval ratings during their first terms -- 35% for Reagan and 37% for Clinton. Plus, popularity isn't a requirement for victory. Several presidents have won with less than 50% of the popular vote -- Kennedy, Truman, Nixon and Clinton did it, and George W. Bush won the election in 2000 but lost the popular vote.

The electoral college is what really matters, and there Obama has an advantage. States with bigger populations -- and more electoral votes -- such as California and New York tend to be reliably blue. Plus, the 18 states (along with the District of Columbia) that voted Democratic in the past five elections carry 242 electoral votes. If Obama sweeps these, he needs only 28 more votes to win and can pick and choose which swing states to focus on. Challenger Mitt Romney, on the other hand, has his work cut out for him: The 13 reliably red states yield only 102 electoral votes, so he must effectively sweep the swing states. That's a challenge, considering five -- Iowa, New Hampshire, New Mexico, Nevada and Ohio -- went blue in at least three of the past five contests.

Obama has a second advantage: Incumbents are tough to beat. In the history of the S&P 500, 14 incumbents have run for re-election. Only four have failed: Herbert Hoover, who many viewed culpable for the Great Depression; Gerald Ford, an overall weak candidate; Jimmy Carter, who ran into the misery index and a very strong campaigner in Ronald Reagan; and George H.W. Bush, who oversaw a recession and fell victim to Bill Clinton's "It's the economy, stupid" rallying cry. Simply put, independent voters often decide the guy they know -- regardless of whether they like him -- is a safer bet than the devil they don't.

Still, it's much too early to handicap the outcome now -- despite Obama's incumbent advantages, no doubt it will be a tough campaign. But regardless of the victor, history suggests a fine outcome for stocks.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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