Will the US election make any difference to the stock market?

Will the US election make any difference at all to the stock market? Popular wisdom has that it will. As James Mackintosh notes in the FT today, "it has become accepted on Wall Street that if Republican Mitt Romney were to carry the White House on Tuesday, shareholders would be delighted. Why? Because "an instant bounce would be followed by a stronger market thanks to Mr Romney's business friendly stance".

But there is a problem with the idea that the market loves a Republican. History just doesn't back it up. On average, says Mackintosh, "the market gains far more under Democrats". That's a point also made by US market guru Jeremy Grantham in last week's Bloomberg Businessweek.

"History speaks pretty clearly that the markets do better with Democrats. Republicans' ideas of what constitutes fiscal responsibility simply are not good for the stock market. Democrats have many tendencies, but one of them is to look after the workers, and actually that tends to be good for demand and good for markets," says Grantham. "These capitalists who are desperate to elect Republicans should study their history books."

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

However, Grantham also makes the point that whoever gets in, the first two years of the presidential cycle which as an investor he says he "worships" are rarely much good for markets.

"Going back to 1932, if you take the first and second year together, they've had no real return in the market. All of the return has been compressed into a gigantic Year Three and a respectable Year Four." Worse, for those thinking of putting money into the market this month, "for us, the cycle years start on October 1st. So now we're in the dreaded first year."

I'm not entirely convinced Grantham is right on this one. Look at the two charts here and here from Yardeni Research, and you will see that there isn't really much of a pattern to the market regardless of who is in charge. What Grantham might be right on, however, is what he says next: "We have Republicans threatening to add fiscal constraints into a very fragile economy. We have the European situation. We have China stumbling in an incredible slow-motion style."

Grantham's conclusion? "I think it's a really good year to keep your head down" (he is OK with blue chip brands and some beaten down European stocks but not much else).

Perhaps, of course, what really matters to the market during a presidential term is not who gets to be president, but how cheap the market is when he takes up his position. Obama moved into the White House in January 2009, a time when even the biggest bears thought most developed world markets were a bargain. They are up around 90% since (including dividend payouts).

The next president will move in (or stay put) at a time when the global economy is in just as awful a state, but when the US market at least is very far from being a bargain.