Where to From Here?: Election 2008

Now that Barack Obama has been elected the next President of the United States, the nation’s inboxes, airwaves, and TV screens are awash with advice and predictions from economists, regulators, political pundits, Wall Street veterans, and investment advisors about what issues Obama should tackle first, and where the nation is headed now that he’s the leader of the free world.

Indeed, many agree with President-elect Obama’s stance that fixing the economy should be at the top of the new administration’s list. Although he faces a daunting task, Obama is already moving to shore up the flailing economy before he’s sworn into office. All eyes are also on who Obama will select to be Secretary of the Treasury to implement the financial rescue package’s Troubled Asset Relief Program (TARP); no choice had been made as of press time, though bandied about have been the names of Lawrence Summers, a former Treasury Secretary under President Bill Clinton; Timothy Geithner, current president of the New York Federal Reserve Bank; and former Federal Reserve Board Chairman Paul Volcker (another reported contender, former Clinton Treasury Secretary Robert Rubin, announced November 6 that he was not interested in returning to government).

The day after Obama’s election, the markets dropped more than 400 points and were still volatile at press time, but history shows that the first-year total annual returns for the S&P 500 have skewed higher when a Democrat wins the Presidential election, according to a nearly 60-year analysis of S&P 500 returns by members of the Zero Alpha Group (ZAG), an international network of fee-only financial advisory firms. However, ZAG warned that what an investor gains in the stock market under a new President might end up being surrendered through tax increases.

Data generated by Savant Capital Management of Rockford, Illinois, and three ZAG members firms–Resource Consulting Group of Orlando, Florida; Carlson Capital Management of Northfield, Minnesota; and Foster Group of West Des Moines, Iowa–noted that, since 1948, in the first year after an election, the S&P 500 has gained 15.8% under a Democratic President as compared to 11.2% with a Republican in the White House. In fact, the firms found, “six of the seven first full years after the election of a president since 1952 to have had negative returns featured Republicans in the White House starting a first or second term in office, including -11.88% for Year 1 of George W. Bush’s first term, -14.66% for the start of Richard Nixon’s second term, and -10.78% for the initial year of Dwight Eisenhower’s second term. Only George Herbert Walker Bush escaped this first year ‘jinx’ among Republican presidents, while Jimmy Carter at -7.18% was the lone Democrat to see negative stock market returns in the first year.”

But ZAG points out that Obama’s tax plans could, if implemented, “more than offset any difference in stock market returns, particularly for higher income investors.” While Republican presidential nominee John McCain wanted to extend the Bush tax cuts, freeze capital gains and Social Security taxes at current levels, and make “estate tax provisions more generous,” ZAG notes, Obama has proposed raising income taxes on higher-income individuals–those earning more than $250,000–increasing capital gains taxes for the same group, raising the Social Security tax income ceiling, and providing for “estate tax provisions less liberal than those proposed by McCain.”