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boblaura The question on every investor’s mind is “What impact will each candidate and their party have on the performance of the stock market?”

In looking at elections past, market reaction to election results appear to work moderately in favor of Republicans. During the last 15 elections, the S&P 500 stock index rose an average of 2.25 percent in years when Republicans captured the presidency (nine times). Conversely, during the six times the Democrats won, markets gained an average of 1.31 percent from Election Day to the end of the election year (1).

Historically, during the same 15 elections, the average S&P 500 return for the year following a Presidential election dramatically underperformed that of an election year. Returns for the S&P 500 during post-election years averaged just 3.06% as compared to an election year average of 9.29% (2).

So What Can You Expect?

Expect continued volatility and broad market fluctuations leading up to election day. The stock market doesn’t like uncertainty and this year’s presidential election seems to be providing plenty of that. But as predictions about the election turn into concrete answers, expect the market to move in a more consistent direction.

The sectors that investors should watch carefully include healthcare, energy, financial, and defense.

Healthcare has been at the forefront of political debates for the last 20 years. With the Democrats, expect a universal health care plan that may negatively impact private hospitals, pharmaceutical companies, and the health insurance industry in general. Senator Obama has vowed to overhaul the medical insurance industry and introduce more competition for prescription drugs, including international competition. While this would be a welcome relief to many patients, it will impact the industry’s margins and profitability. Look for companies that are able to leverage technology to improve care and operational costs.

The energy sector will likely see the most change. Both camps have discussed initiatives that focus on reducing our dependence on expensive oil imports. This will inevitably open up opportunities for companies providing alternative sources of energy. Under the Democrats, this will likely translate into shifts towards alternative energy and fuels including solar energy. Obama opposes lifting the moratorium on oil drilling, focusing instead on the need for renewable energy sources. McCain on the other hand, supports lifting the moratorium, obviously opening the door for drilling firms. Expect both candidates to create and extend federal policy that reduces our dependency on expensive foreign oil.

In the financial sector, McCain would like to make President Bush’s tax cuts permanent and perhaps cut rates further. Democrats want tax cuts aimed at the rich to expire, which has the financial sector worried about the future of the estate tax as well as taxes on dividends and capital gains. Hedge funds could also be subject to higher taxes under a Democratic president.

In the defense sector, expect spending and the allocation of tax payer dollars to the military to increase under a Republican President, as they favor a stronger military presence around the world. With the Democrats, expect a downward shift in spending as plans for troop withdrawal and a move toward more technology-advanced companies comes into play.

In the long run, the agenda that either candidate will bring to the office of President may have a major impact on a broad range of issues that will affect investors directly and indirectly. Success in translating many of those agenda items into action, of course, is linked directly to whether or not the House and Senate are controlled by the president’s party. When one party is in control sweeping changes can typically be made more quickly than if the balance of power is divided between the executive and legislative branches.

The Reality of Presidential Elections And Your Portfolio

The one thing that can be said is that over time, investments in the stock market have prevailed regardless of who holds political office. The data makes for interesting coffee or cocktail conversations, but investment decisions should be based on more than a one-time event like a presidential election.

Robert Laura is a senior bank executive, a professional financial speaker, the author of Financial Karma and The Five Most Important Things They Don’t Teach You In School. He maintains the FinancialFYI.com website for interesting financial news, statistics, and research and is the creator of the webs first and only behavior based money management program, My Financial Reflection.com. He can be contacted at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

(1) Nola.com, What To Expect From An Investing Standpoint Because Of The Fall Election, by John Gin, August 8, 2008
(2) The Street.com, Four Ways To Play Trade A Presidential Election, by Scott Rothbort, June 12, 2008